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

 


 

Leave a Comment:

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

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.