Institutional investors are eyeing the bulk liquid chemical tank storage sector for low-cost and innovative acquisition. Dr Gareth Evans reports.
The chemical industry has weathered economic downturns before but the events of recent months – and the fundamental changes they have wrought – speak of something altogether different and more lasting in effect.
Within Europe, the prolonged period of sustained growth and profitability of recent years has been replaced by falling sales, dwindling demand and collapsing prices, which have plummeted from their August 2008 apogee to a new five-year low.
The same picture is largely reflected throughout the industry globally. In the US the demand decline has been felt in sectors as varied as car manufacturing, construction and inessential consumer products, while even China's runaway economic growth has slowed to a "mere" 5%.
Faced with the pressing need to secure cash flow and adjust output to the lessened demand, many industry players have instigated shorter working hours, temporary and permanent lay-offs and plant closures. In addition, there has been significant curtailment of capital expenditure plans. With little realistic prospect of an upturn anytime soon, much less a return to the halcyon days of 2007, over the last six months the world's major chemical producers have already announced more than 50,000 job losses.
There is hope, however, despite the gloom and much of it centres on aspects of storage from traditional and established bulk tanks, to more innovative environmental technology applications.
Investing in storage
Somewhat unexpectedly in the post-financial-crisis climate, while private equity funds remain wary of providing the previously easy availability of credit which historically fuelled so many spin-outs, mergers and acquisitions, institutional investors are increasingly eyeing the bulk liquid chemical tank storage sector.
Speaking at June 2009's first annual Oil and Chemical Logistics Networking Event in Antwerp, Belgium, Challenger Infrastructure Fund (CIF) executive director Emil Pahljina said that the resilient, stable and predictable nature of the earnings and revenue stream was a major factor in the attraction of the chemical storage sector. CIF is the lead partner in the consortium that acquired the world's second-largest independent chemical storage company LBC Tank Terminals in 2007, for the sum of €565m.
According to Pahljina, institutional investment has accounted for around 20 million cubic metres of bulk storage capacity over the last four years and he believes that similar moves will continue as part of a growing trend of diversifying risk away from listed equities or bonds. Against this background, infrastructure assets – particularly those with what he describes as "high barriers to entry and inelastic demand for services" forming "capital intensive businesses with relatively high operating margins" – are now high on the investors' list.
The fact that tank storage companies are generally inexpensive compared to other similar assets, making them relatively low-cost acquisitions, also plays a significant part in driving institutional investment in the sector.
Storage companies with assets in key strategic locations, where physical restrictions on alternative site availability produces a persistent underlying demand for their services, can have a realistic expectation of good economic resilience, even in the current climate.
Vopak, the world's independent provider giant, is a prime example. According to the company's preliminary report on the first six months of 2009, the group operating profit excluding exceptional items is anticipated at €185m, 18% up on the same period in 2008. Moreover, there are expansion plans afoot.
In June 2009 the company's new chemicals storage terminal in Dong Nai Province, Vietnam was commissioned: a total of 35 tanks with a combined capacity of over 48,000 cubic metres and with the potential to grow further. Meanwhile, in France Vopak has entered into a joint venture with Shell for a liquefied natural gas terminal at Fos-sur-Mer. Unsurprisingly, Pahljina has expansion plans for LBC too.
An innovative environment
For all that the global financial crisis has dominated much of the industry's recent consciousness, the wider demands to ensure environmental performance and minimise corporate carbon footprint remain every bit as relevant.
Coatings recycling is one area within the tanks and storage sector that has gradually emerged to show some promise as a potentially robust business opportunity environmentally and economically. Initiatives to recycle the surplus coatings of tank and storage vessels are nothing new and a range of ideas have emerged over the years, with varying degrees of success. However, what has changed is the circumstances in which they operate – and this shift has begun to make a significant difference to companies operating in this space.
Writing in Chemical Processing consultancy EPCOT International president Girish Malhotra said that the successes of Kelly Moore – a California-based coatings company and major innovator in water-borne coatings technology – in producing recycled coatings shows that the time is right for others to follow suit. "Companies have the knowledge base and the creativity to develop coatings that can have significant recycled material as a part of their formulation," Malhotra says. "Strategic and interchangeable use of different raw materials is the key for recycling. This would be a win-win."
Perhaps the most potentially important and innovative aspect of storage – and potentially one of the most lucrative in the long term – lies in the growing need for energy storage, which some commentators have tipped as the next multi-billion dollar sector for the industry.
According to a report recently compiled by Bank of America Securities-Merrill Lynch analyst Steven Milunovich, work to develop the next generations of lithium-ion batteries for hybrid/electric vehicles alone could represent a $20bn-plus market by 2020. By comparison, today's entire energy storage sector has a total market capitalisation of under $2bn a year, a "miniscule" amount, Milunovich says. Although he concedes that things will take some time to ramp up, he says that there are substantial prospects to be developed over the coming years.
Deloitte Consulting recently published its mid-year outlook for the global chemical industry and one message that comes out of it is the difficulty that companies are experiencing in their attempts at forward planning, given present uncertainties. Many analysts warn that the changed industry that will ultimately emerge from the dislocated market could be serving radically different customers and needs from the one that went in.
If so, while the immediate outlook may be a bleak one, where guaranteeing working capital mandates reducing inventories and cutting costs, there could be major opportunities to come for those companies which position themselves astutely for the future.
Exactly where these new markets will lie – in a "post-recovery" India or China, elsewhere in Asia, as some believe Vopak's venture in Vietnam may presage, or in developing innovative green technologies –remains to be seen.