Navigating The Volatile Market Strategically With Leo Maguchi, ITOCHU

Updated: Oct 12

Due to the pandemic and many natural disasters in 2020-21, today's volatile market provided a considerable amount of challenge to Leo Maguchi and his company. But even with this rocky situation, the demand is not going anywhere and must be addressed. Leo joins Victoria Meyer to share his work at ITOCHU, a leading distributor and marketer of inorganic, organic, functional and specialty chemicals. He explains how they operate amid the COVID-19 scare, freight rate increases, and tons of regional shortages. Leo also discusses the need for decisive and flexible leadership today that prioritizes digitization and sustainability for businesses to survive.


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Navigating The Volatile Market Strategically With Leo Maguchi, ITOCHU

I'm talking with Leopoldo Maguchi. Leo is Section Manager for ITOCHU Chemicals America here in Houston, where he heads up the commodity resin trading business for ITOCHU. Leo has many years of experience in the resin business. He's going to share a lot of great insights with us. Leo, welcome to the show.

Thank you very much, Victoria. Thank you for inviting me.

I’m delighted to have you here. Why don't you give us a brief introduction to ITOCHU?

ITOCHU is a Japanese trading company founded in 1858. The company was founded by Mr. Chubei Itoh, who started in a very humble textile trading business as a merchant running around Japan in sandals on foot. ITOCHU is a publicly-traded global trading and investment company with over 26 billion in sales and around $2.6 billion in profit. It's traded on the Tokyo stock exchange. ITOCHU has a wide variety of businesses that they get involved from metals and mining, food, energy chemicals, retail, machinery and other businesses. ITOCHU has over 100,000 employees present in 67 countries and owning over 366 group companies around the world.

In specific, here in Houston, we are at the business section for plastic exports. Our role here is we support North American plastic producers in the sales and marketing of polymer resins such as polyethylene, polypropylene, PVC resin as well. We have a global presence as ITOCHU. What we primarily try to maintain is that a function of balancing supply and demand of resins globally, but we also have distribution companies that are deeply rooted in different regions in the world in providing dedicated marketing and stocking distribution business, as well as technical services to our customers.

ITOCHU is unique because we are also investing in the manufacturing of plastic products, such as shrink film, shopping bags, uncultured fumes, household injection molding products and compounds and masterbatches. We own approximately 450,000 tons of plastic resin conversion capacity in manufacturing companies that we own around the world.

I did not realize that conversion part of your business. I knew about the trading part. Where is most of that conversion capacity? Is it here in North America or is it primarily Asia centered?

Primarily, it’s in Asia concentrated like in China. It was becoming a very expensive place to manufacture in the ’90s. We had a push for many producers moving to China specifically or Southeast Asian Regions to take advantage of the cheaper labor cost. They will manufacture finished products and they will import into Japan. Now, ITOCHU also has ownership in some of the conversions, for example, shrink film producer.

Volatile Market: There's a rewrite of what is the optimal inventory and the operational model. This is probably going to change in terms of globalization going to localization and moving into critical supply in critical infrastructure.

In the US, we have a company called Bonset and they do PVC shrink films for these bottles shrink film. We have a plant in North Carolina and also, they have a plant in Uruguay. We also have compounding businesses in Europe that we are investing in there. Primarily it’s automotive industry. We have increased our presence in all the regions as well.

Here in the US, you're primarily an export business, which I would guess has been a little bit challenging in 2021. Tell us about what's going on in resins markets now, polyethylene, polypropylene, PVC, what do you see happening?

Resin markets nowadays, it has been quite a rollercoaster ride. Ever since March of 2020, with lockdowns, we had moments where resins were uncertain of the demand in North America. With all the lockdowns of factories and restaurants and all these businesses. With that, there was a huge pressure of resin to be exported. The next thing happened that consumers started buying more products. Consumer behavior changes into going instead of malls going to online shopping.

The demand for the films, especially for eCommerce films that we call, what is needed for packaging and shipments, is spiked up. Obviously, food, there was more consumption in supermarkets instead of restaurants, but that also brought a huge consumption of plastic resin on those grocery bags and bread bags in those areas. It was a reversal of after the uncertainty of export, now we need all the resins here in the US. It went through a prolonged period of time of adjusting to the rising demand. The supply had to adjust to that, but we are seeing is that we went to a cold freeze in February 2021.

That was a big disruption in a lot of ways. Big economic impact.

We’ve been through hurricanes and flooding in Houston many times. We have a lot of issues that stem from over the course of years with production and tightness, but this was quite different with having simultaneous shutdowns from oil, gas, nitrogen, our utilities. We’re talking about also plants. Everything shut down. Not only the resin or the monomer, but it’s also the additives and the catalyst. Having to start all these units, petrochemical units in the Gulf area, simultaneously, it’s a challenge with bottlenecks making it difficult to have a smooth takeoff. We saw this was going to be a lengthy process.

Up until May-June of 2021, during that time, we look at the numbers. Finally, June 2021, we saw some significant spike up on the inventory of the resin by the chemistry council. It gives us a little bit of feeling that things are getting normal. However, if you look at the details, there’s still some shortage of hexane comonomer, for example. Hexane comonomer is used in HD blow molding manufacturing, as well as resin production, as well as in linear low metallocene resins that are hexane based. That has continued to drag the availability for export. In July, August 2021, we started seeing that there was quite an inventory bill.

Part of it is because there is some plant maintenance that would have been in August and September 2021 that some producers were building that inventory. Also, it’s the hurricane season, as we found out with this hurricane Ida that went through. There goes the fact that shutting down a plant for maintenance takes a long time to go through the process as there’s a lot of social distancing and managing the situation. We look at the numbers, it looks like quite a buildup of inventory, but that’s also rightfully because of those backgrounding of what’s happening.

Some of it was planning as opposed to a supply-demand imbalance. Now, Ida has hit Louisiana and impacted many other parts of the US. This is obviously an effect on your business when you think about relying on a product coming out of the US Gulf Coast to serve global customers. How do you guys respond to that? Are you shifting supply sources? Are you changing your commitments? How do you deal with this continued supply volatility, I would call it, to your business and your customers and into your producer partners as well?

Volatile Market: Having the ability to source from different regions gives an advantage in fulfilling contractual obligations, covering both the buy and sales sides.

From our side from North America, exports are one of the last lines, the domestic take quite an important priority because of the newness and the contracts that are in place. Also, the market has a much higher price mid-back for producers. What happens is whenever we were to get caught in this situation in a prolonged period of time, we see a natural effect of bringing materials from other regions. That's what exactly a company like ITOCHU is good at.

We do see that arbitrage opens soundly and customers are looking to seek for where they can source the material when things are dry. We were able to bring materials from Asia, from China. At one point, China was slow. The demand was declining because there was a strong initiative earlier in 2021 from the Chinese Government to contain that inflationary effect of commodities. They climbed down on the pricing of the features and it could cause a little speculation that they were controlling that.

They have the ability to do so and the influence in the market. They're part of the demand of polymers gas.

With that phenomenon, it opened up arbitrage of Chinese products being re-exported. A lot of our cargoes that were once sent from the US went to China. There was a lot of cargo that was coming out. Obviously, as ITOCHU, we do not handle these products that are coming in and out more driven by producers, but we saw competition getting into the market and exporting into South Europe from China, China going into Latin America. We are seeing this also impacting the producer’s position because Southeast Asian producers were getting inundated with a lot of Chinese re-export materials. They had an excess of material. We helped them move into Latin America, which was getting quite tight but at the same time, as you know, the container market has been strong.

Yes, that was going to be one of my next questions here. How has the logistics challenges impacted this? As containers shortages, dramatic increases in freight costs, how have you guys managed that or what impact is that having on trade flows in your business?

This is probably the hardest thing to do because these freight rates, as probably you've read, a lot of these had to do with this pent-up demand of the shifting of eCommerce and a lot of that. It spiked up the demand partly, also driven by the stimulus that US government was injecting into the US economy. The individuals were changing from small houses to big houses so they had to readjust their lifestyle with furniture and with all the amenities for their yard to become like a small park for them.

Consumer spending around people's homes and lifestyle has been high.

All these have created this huge volume of product that is going through this like an imaginary boa. It’s that huge volume going from Asia to the USA. The problem here is that the retailers like Walmart or Home Depots, they jumped in straight into getting secure space from the container shipping lines off of it. After that, whatever is left over is what we are seeing. That is the freight was going up from $4,000 per 40-foot container.

It spiked up now as $25,000 per 40-foot container. You’re not going to own it. You just need it for 45 days, then you’re going to return it, but it’s equivalent to it. How can you deal with that kind of cost? There’s nothing as an intermediary. All we got to do is pass on this cost. The economic phenomenon. Sometimes we call in economics supply-demand that there is a deadweight loss. That weight loss is equivalent to the tax. The tax has increased.

There’s a lot of loss created by that and that we lost. Now I should interpret this increased freight rate. It’s the weight loss caused by the freight. You have the supply prices. Supplier is not able to push up too much price as you have seen in the case of Asians resin has been depressed in somewhat compared to the US. Unless that price, you should not be able to absorb the price that the freight costs of $400, $500 per ton and to be able to successfully sell into like regions like Latin America or in the US. This is what also happened to us.

We do have some businesses that we import from Asia, some resins. Those resins that came in were stuck at the port and what we had to do was we have to get a trucker. The trucker’s strike now. It’s like $10,000 to Los Angeles to Ohio, for example, to give you an idea. Before, it used to be $4,000. Everything is rising from that point. At the same time, customers do need the product. We have to pass it on to the customers and obviously, what happens is the customers are passing this as part of the operation costs for their goods into their sales price. This translation is not perfect. At one point, yes, we did absorb some things, some costs and later on, the customers were able to start taking it. They needed more products, so they were like, “No questions asked. Give me $25,000 freight. It doesn’t matter. Bring it to me.”

That’s part of the inflation that we’re starting to see a little bit of everywhere. What’s interesting is I’ve read a couple of things, and I’ve heard from talking to some other experts. The polymer markets and resin markets are becoming more regional. It’s one aspect of it. Certainly, in pricing, we’ve seen, and the US has had dramatically higher pricing perhaps than other regions, and the freight arbitrage is not the full story. That’s one piece.

The second thing I read was that supply chains are going to move more vertical versus horizontal. Instead of having these supply chains that are about going from China to the US, US to China. It’s going to become North America to South America that we’ll see more vertical supply chains. Maybe from China and heading South from there. Do you guys see shifts in supply patterns driven by the freight rates and other factors?

Yes, it’s near-paralysis of this commence. You cannot continue to do this. There’s a push for, sometimes we call it East to West Movement as the tri-mental shipments now in North to South, which is the regional distribution. We do see this change. We started seeing from 2020. We have some converters that we sell with polypropylene in Central America. They do cutleries like forks and knives. They were not used to getting phone calls from the US Manufacturers because they were getting a lot of those cutleries from the ones that are sold in say, Party City. They were coming from Asia at a much cheaper price, but as the freight rate spiked up also, Party City started looking regionally.

Why can’t we source? Because the problem about deliveries and problem about also a better cost structure because of that freight component is inflating everything. Seeing this sudden spike up, that’s why one of the things that is curious about this pandemic happens that in Latin American region, which was a region that is being affected in somewhat Asia imports into Americas. Not only into US but also into the South America regions, like shoes coming in or garments that is from Asia.

All of a sudden, the local retailers are asking local producers, “Please, can you give me 25% more? Prices will be 25% higher. It doesn’t matter. I’ll take it.” We’re seeing this phenomenon going on. At the same time, Toyota model of Just-in-time was nice and very popular. We realized that Just-in-time gives no room for this pandemic to react. Hence the chips are causing all these backlogs. Each one of them costs a lot of money.

Volatile Market: There's a spike up in sustainability initiatives around the world across different business sectors.

There’s a rewrite of what is the optimal inventory and the operational model. This is going to change in terms of not only globalization going to localization but also in time moving into critical supply and critical infrastructure, which also plans out one of the things that you go to any car manufacturing or if you have something broken, it’s going to take you eight weeks to get the parts.