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

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Latest Updates

Economy

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Superannuation

No, Division 296 does not tax franking credits twice

Claims that Division 296 double-taxes franking credits misunderstand imputation: franking credits are SMSF income, not company tax, and ensure earnings are taxed once at the correct rate.

Investment strategies

Who will get left holding the banks?

For the first time in decades, the Big 4 banks have real competition in home loans. Macquarie is quickly gain market share, which threatens both the earnings and dividends of the major banks in the years ahead.

Investment strategies

AI economic scenarios: revolutionary growth, or recessionary bubble?

Investor focus is turning increasingly to AI-related risks: is it a bubble about to burst, tipping the US into recession? Or is it the onset of a third industrial revolution? And what would either scenario mean for markets?

Investment strategies

The long-term case for compounders

Cyclical stocks surge in upswings but falter in downturns. Compounders - reliable, scalable, resilient businesses - offer smoother, superior returns over the full investment cycle for patient investors.

Property

AREITs are not as passive as you may think

A-REITs are often viewed as passive rental vehicles, but today’s index tells a different story. Development and funds management now dominate earnings, materially increasing volatility and risk for the sector.

Australia’s quiet dairy boom — and the investment opportunity

Dairy farming offers real asset exposure, steady income and long-term growth, yet remains overlooked by investors seeking diversification beyond traditional asset classes.

Sponsors

Alliances

© 2026 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.