Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 55

Material shift from production to distribution

There is a fundamental change occurring in the global production of basic materials. The Asian economies, hungry for growth, are combining access to cheap labour and cheap energy on a massive scale. The result? An oversupply of materials, which is destabilising the Australian market.

The production of basic materials, such as petrol and cement, is a capital-intensive exercise. Historically, these materials would be supplied by a handful of local companies that would build the infrastructure at great cost, and in return, enjoy monopolistic pricing power. As a result, the producers of basic materials in Australia have been relatively sheltered from the rising powers in Asia due to distance.

Australian producers uncompetitive

But with global shipping rates decreasing and the Australian currency remaining relatively strong, Australian production has become uncompetitive. The giants of Australian industry, which enjoyed favourable market dynamics for decades, are faced with the reality that their business models must fundamentally change – and fast.

Let’s first look at the impact on the Australian fuel market, which was traditionally dominated by BP, Shell, Mobil and Caltex. The companies would import crude oil from Africa or Singapore to produce petrol or diesel in their onshore refineries.

Singapore was traditionally the only refiner to export to Australia in volume, but in the past five years there has been considerable investment in the region. Because fuel is refined in accordance to universal standards, a wide range of commoditised products can now be sourced from anywhere in the region – Japan, Taiwan, China, Korea, India.

For Australian refiners, it is now more economical to convert existing refineries into import terminals. Not only does this outsource the risk of production (which can be very volatile), but the lead time is reduced from months to weeks.

Caltex made the decision in 2012 to restructure its supply chain and focus on distribution. It is likely that it will import all of its product within ten years. Due to its global reach, Shell has chosen to direct its resources to exploration. It has since sold its Australian petrol stations and refineries, but will retain ownership of its aviation fuel business and grease plants in Brisbane. There are reports that BP is also considering the sale of its refineries in Queensland and Western Australia.

The same shifts are occurring in the region’s cement industry. The main producers in Australia are Adelaide Brighton, Boral and Cement Australia. In the early days, each player had invested in a particular state due to the natural monopoly afforded to capital-intensive cement production. This limited competition skewed the bargaining power in favour of the resident-producer, and so competitors would be forced to accept the terms of their interstate counterparts when supplying product outside of their primary markets.

But in the past decade, there has been a dramatic shift in the global cement market, which is described by Boral in its 2013 Review. Ten years ago, 95% of cement was produced in Australia, while 5% was imported. In 2013, 70% of cement was produced in Australia, and 30% was imported. This trend is likely to continue, as Australia’s demand for cement is 10 million tonnes a year, while China is producing 2.15 billion tonnes a year.

This has dramatically changed the economics for the local incumbents. Like the fuel refiners, the incumbents are focused on shifting their value chain to the distribution of building materials, rather than production. Boral has converted its production facility in Victoria to an import facility. Adelaide Brighton has invested in Malaysia to source product from overseas. Cement Australia also has plans to build import facilities, and has recently terminated a major contract with Adelaide Brighton in South Australia as a result.

So where will the value lie as these major players transition from production to distribution? Does this create investment opportunities?

Pricing power

Typically, distributors aren’t compelling value propositions because they don’t control the product, which means it is difficult to exercise pricing power. But this dynamic may in fact be favourable to the incumbents, as they change from a volatile, capital-intensive business, to a model that is characterised by steadier cash flows.

Sustainable value will be dependent upon the companies’ bargaining power with suppliers. In the case of Caltex, the company has favourable bargaining power with suppliers given the number of mega refineries in the region. If Caltex can build an efficient operating model, this may provide enough protection to withstand the Asian advances in the medium term. But given how rapidly the global market is changing, the landscape may be very different in another ten years.

 

Roger Montgomery is the founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able

 

  •   28 March 2014
  •      
  •   

 

Leave a Comment:

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.