Sergey Belskiy: “After the pandemic, both logistics and the market will change”
The coronavirus pandemic that originated in China and spanned across the whole world could not but affect the global fertilizer market and the agro-industrial complex. According to Sergey Belskiy, the founder and managing partner of Metal Supply Experts, the imperceptible changes that are taking place in these sectors are revolutionary.
— Mr. Belskiy, how do you assess the current situation in the global fertilizer market?
— It is very ambiguous and the answer depends which particular group of mineral fertilizers we are talking about. Demand for nitrogen fertilizers, both for urea and for ammonium nitrate is stable, but in the next couple of months it will decrease as spring field work develops and additional fertilizing is carried out in Europe and the US.
Orders for potash fertilizers are currently much lower in tonnage than last year, due to accumulated stocks in China and decrease in government subsidies for their acquisition in India.
Demand for phosphorus fertilizers is stable, as well as their prices, which was greatly facilitated by the spread of coronavirus in China. In Hubei province, which became the virus’ hotbed, and where also many phosphorus fertilizer enterprises are concentrated, the production activity has declined drastically due to quarantine measures.
Therefore, there are prerequisites for decrease in their exports from China, as well as from Morocco and the United States. But their demand is ought to go up, precisely in the US, as the sown area is to be developed and expanded in the near future. The same thing will happen in South America.
— You mentioned the effect of coronavirus on the production of phosphate fertilizers in China. In addition to it, how did the pandemic affect the mineral fertilizer markets of other countries?
— A lot here is determined by the geographical location of a particular country, the features of its industry and agriculture. For example, a number of countries in Western Europe have experienced a shortage of seasonal workers due to restrictions on passenger traffic due to the epidemic. As a result, local farmers were forced to reduce their purchase of mineral fertilizers.
In fact, quarantine measures have affected many countries around the world, as they have led to restrictions on traffic, a drop in transshipment at ports, and difficulties in delivering agrochemicals to final consumers. The situation is not simple, because it is not clear how long the pandemic will last, whether there will be a second wave, about which many are now talking.
— Over the past few years, Russian chemical companies have not only stepped up sales to the domestic market, but have increased exports, trying to strengthen their presence in various countries in the world. How successful was their expansion?
— In my opinion, the fact that products from Russia are in demand in Europe and Africa, South and North America is a clear evidence of the excellent results they have achieved.
And each has its own strategy. PhosAgro prefers to open sales offices abroad, while EuroChem also acquires enterprises. At the same time nevertheless, creation of distribution divisions, tailored exclusively to the supply of mineral fertilizers, limits their ability to expand their positions in the global market.
— Then how can they strengthen their positions? What would be helpful?
— It is advisable to turn to Japan’s experience. As you know, the Japanese economic miracle was achieved through the creation of nine universal trading houses Mitsubishi Shoji, Mitsui Busan, Itochu Shoji, Marubeni Corporation, Sumitomo Shoji, Kanematsu, Nichimen, Toyo Menka, which take on more than 60% of Japan’s foreign trade despite the fact that Japan’s foreign trade employs more than 12 thousand other companies.
The initial task that was set before them was the establishment of control of national capital over the country’s foreign trade. It was done in order to facilitate and modernize the Japanese economy, and the task was successfully completed. For several decades, the share of Japanese firms in the country’s foreign trade balance increased from 1% to 80%.
In addition to sales functions, Japanese universal trading houses took on a number of other functions related to the organization and servicing of the flow of goods, including organization of supply chains, creation of distribution warehouses in consumption centers abroad and financing of deliveries. No wonder Marubeni Corporation plays a large role in the agricultural business, selling plant protection products, mineral fertilizers, seeds and grain trading. It has a separate division.
By creating such trading houses that sell not only mineral fertilizers, but also plant protection products, agricultural machinery, metal products and structures, domestic companies will be able to seriously increase their income. Indeed, today their customers prefer holistic service.
— Personally, it reminds me of metal trading, where a number of traders managed to form extensive distribution networks and even gain control over the plants.
— That’s correct. In general, I believe that the experience of the metallurgical business is quite applicable in the chemical industry, and particularly in Russia. Our mineral fertilizers producers can do such a large-scale task even in current difficult times.
Yes, it is complex, however, it is precisely today that new opportunities arise that can be used to expand and significantly strengthen our market position in the long term.
The coronavirus pandemic itself is a done scenario. Now we need to think about the new world parameters that are being formed. Of course, in many ways this will be a new paradigm shift in relations at the social and market levels.
Each company will be forced to seek its own individual balance of power, taking into account the new market, fiscal and political realities of the world after the pandemic. Moreover, a number of changes will have a shared nature for all market participants. The future and, ultimately, survival depend on how a particular business quickly and effectively adapts to the new reality.
— What, in your opinion, will be the main world trends after the coronavirus pandemic?
— Firstly, the growth of national protectionism and competition in the conditions when the coronavirus revealed huge differences in the effectiveness of management and the mobilization capabilities of different countries and systems. Some countries will have the opinion that unions, commonwealths and other associations have been weak, ineffective and unable to provide collective protection to their members.
Secondly, increased competition in the face of declining demand. The need to reduce risks and costs caused by extended production and logistics chains. The growing desire to obtain alternative suppliers of raw materials and in other markets.
Thirdly, the increasing dependence of industries on financial institutions and state support in times of a crisis. This would lead to a toughening struggle for access to institutional, investment and public finance.
And lastly, the acceleration of the business “metabolism”, additionally due to the forced introduction of digital remote control and monitoring systems amid a pandemic.
The health crisis showed how important it is to reduce the dependence of processes on labor by automating and eliminating unnecessary operating links.
Many of the trends described above did not develop simultaneously. But the crisis has accelerated and strengthened their influence on our society and businesses. The world is changing. And it changes much faster than we could have expected a few months ago. Even before the pandemic, it was obvious that competition in the modern world is no longer reduced to price competition, since most manufacturers adhere to the same price parameters. Product competitiveness is also not affected by the quality characteristics of a product, since the quality of most manufacturers to one degree or another complies with industry standards.
In the modern world, there is no need for resellers whose value lies in their knowledge of end consumers and the availability of necessary regional contacts. All information about consumers, their requirements, optimal logistics routes, contractors, etc. can be easily found by the manufacturer on their own without intermediaries. Perhaps the only thing that in the current environment does not lose, but on the contrary increases its value, is the value of working capital and effective financing.
Competition in the modern world is, first of all, competition for the efficiency of operational management and information flows, as well as quality and volume of service provided to consumers. Not only survival and victory in the competition is important, but also an increase in the added value of a product, since effective management reduces costs and consumers are willing to pay a premium for the service, especially if it is unique and helps consumers solve their own problems.
For example, in the fertilizer market it is no longer enough to ship products to the ports of destination, but it is necessary to create regional warehouses and buffer hubs, which will ensure that agricultural producers are guaranteed to be provided with the necessary products.
This entails an exponential increase in the volume of online information on one hand, and the need to attract additional financing on the other, which is also associated with a huge additional volume of information flows, the need for a more advanced risk management, control and analysis system.
Additionally, while it is still obviously important for agricultural producers, but it is not enough just to have a guaranteed source of fertilizer supplies anymore. It is also important for them to show and prove the quality of their products, which is largely associated with the agrochemicals used in the cultivation of certain crops.
In fact, we are talking about the need for a qualitative leap in the effectiveness of the supply chain management system, which includes planning, production, logistics, marketing, supply, sales, inventory and working capital management, data analysis, etc. It is also important that the chain should be extended to each agricultural producer and further to the final product on store shelves. Of course, all participants in the chain are interested in such an integration system.
As applied to the mineral fertilizer industry, those producers who will initiate and build such a system first will benefit greatly, as the existing traditional control mechanisms no longer meet the requirements of the new reality. They are too fragmented, slow and do not have the potential of exponential market growth due to market coverage and the construction of new service models.
— Then what should be the new management, control and analysis system that ensures business success?
— Most importantly, a company must be aware in real time of the actual geolocation of their products, responsible parties (custodians) and product characteristics throughout a production and logistics chains. In addition, the company needs to receive immediate warnings about any discrepancies between the planned (target) and actual data, including geolocation, graphs, changes in product weight, and more. Such warnings should contain sufficient information to address the problem as soon as it appears.
Such an operational control system should be universal and not have restrictions on types of cargo and complexity of multimodal logistics. It should be as cheap as possible, easy to use, not require paper media, additional product labeling, installation of additional equipment along with cargo or hiring of additional employees.
For this system, the ability to track the characteristics and history of a product along the entire chain of its transformations from feedstock to the final product is crucial.
With regard to mineral fertilizers, this means controlling the entire production and logistics chains from raw materials to the final product, in production of which a specific batch of agrochemicals is used. Information should be easily transmitted in a uniform format sequentially to each participant of the production and logistics chains, and be a unified marker of reliability and transparency.
The system must be independent and certify reliability and transparency of the entire supply chain up to and including the final product. Such certificates are important for each participant in the chain in relations with financial institutions, consumers, investors and regulatory authorities.
Attempts to create such a system have been made repeatedly in recent years, but were either unsuccessful or not widely used due to severe restrictions on the number of operations and the high cost of their implementation and maintenance (in particular, based on blockchain technology). There are known cases of development of such systems by producers themselves, which required them to make significant investments and expenses for their maintenance. However, as you know, the created systems and their certificates were not considered independent by financial institutions, regulatory bodies and markets, which also significantly discounted their significance.
— But still there must be a successful example of an online operational control system applicable in “real” industry?
— Of course. The Swiss system called Vareye, which entered the market in 2019 is a great example. It is is based on a combination of a highly secure cloud platform, ability to issue chains of its own QR codes, and identification and geolocation embedded in all modern smartphones.
Vareye is a global system of online identification, control, analysis and certification of production and logistics chains from raw materials to the final product of any complexity.
The system provides a user with online access to all the needed information on a product creation chain – current characteristics of a product (including batch number and mass), changes in its weight/volume as it moves along the chain of transformations, storage and transportation. It also gives live updates and history on individuals responsible for a particular batch of the product (in particular, the data necessary for the entities’ or individuals’ quick identification and communication with them) when and where the product was transferred to the next responsible person in the supply chain and where it is currently located, including its actual geolocation during transportation by sea and by road.
— Given the huge flow of information, how can a Vareye user quickly identify a problem and respond?
— Vareye automatically and immediately warns the owner by e-mail of any discrepancies among the parameters specified by the owner: route geolocation, product weight, discrepancies between the next responsible person or a custodian, who was initially designated by the cargo owner.
Information is transferred along the chain between the persons responsible for the product by scanning from smartphone to smartphone a secure and interconnected chain of QR codes containing all the information about the cargo and the history of its origin, transformation and logistics.
The system also identifies the actual geolocation of the responsible person who is required to be with the cargo and is responsible for its safety (for example, the master of the vessel or the truck driver). This feature is especially important because alternatively the information on the actual geolocation of the cargo is received by the owners either late or it is technically impossible in case if the carrier’s GPS transponders are turned off or are missing.
All information immediately becomes available to the product owner online and can be transmitted both to his computers and smartphones. Alerts can be sent both to the employees and to the management of choice of the owner of a product.
As a result, the Vareye system provides highly effective protection for the owner and makes it impossible or economically unfeasible to perform a wide range of fraudulent activities with respect to the product and its owner. The system is an effective tool for ensuring reliability, security and transparency of the entire chain from raw materials to the final product.
— But what about information security? How vulnerable is Vareye?
— The Vareye QR code cannot be read by anyone other than the product owner, the next person responsible for the product, and the next person responsible in the chain.
Information on the current status of the product, the previous and next responsible person appointed by the owner is available to the next persons in the chain.
In this case, all information about the chain, including data on the actual routes and transformations of the product is seen solely by the product owner. The information provided to the owner by Vareye system online is key in the operational planning, management and analysis of the owner’s production, commercial, logistics and financial process.
At the same time, Vareye does not require commercially sensitive information that does not affect the operational control of the product – for example, prices, premiums and discounts on the product, logistics rates, storage and product transformations.
Thus, the system is commercially safe due to its structure and specified information flows. Electronic and physical protection of the system is also not in doubt.
— How much does such a system cost for its user? In current crisis conditions, everyone has to tightly control their expenses.
— Vareye does not require investments in equipment, personnel or special training on users’ side. The system does not require additional product labeling or creation of additional labels. Also, transfer or storage of information on paper is not required as well. For Vareye functionality, it is enough to have smartphones among a product supply chain participants , in addition to operating computers in the user’s office.
All operational activities of the system are carried out directly by Vareye.
The influence of Vareye on product costs increase is negligible and is repeatedly inhibited by additional resource savings, acceleration of information flows and creation of the value-added element with increased reliability of the product owner in the eyes of its consumers and financial institutions.
— Why does it make sense to use Vareye as a third party system vs using it as your own? For example, one can just buy a license for an independent use of the platform?
— Vareye acts as an independent entity in the certification of transformation and logistics chains from raw materials to the final product and operates in Switzerland, in accordance with the requirements of Swiss and international legislation.
Vareye certificates can be presented by the owner to financial institutions, regulatory authorities, as well as partners as an independent confirmation of its reliability and transparency of product origin, processing and logistics chains.
At the owner’s request, Vareye may provide online information to financial institutions, regulatory authorities, and owner’s partners involved in financing or processing of a product. Such information is independent, which is important for compliance purposes, in accordance with the requirements pushed by financial institutions involved in product and logistics chains.
In fact, Vareye is a highly secure and independent information channel that can be used in contracts and financial activities of a product owner. The issued certificates can be transferred to the next product owner and work as the proof of reliability and transparency. This certificate transaction can be used as a tool that increases reliability and transparency of a product owner in the eyes of its consumers and the market community as a whole.
Thus, with the help of Vareye, one can achieve full online operational control over the transformation chains and multimodal product logistics, as well as ensure their safety and security. Moreover, the entire process is certified by Vareye as an independent third party, and the information is stored by Vareye for an unlimited time in the interests of the owner.
— Mr. Belskiy, I know that the Vareye system is already used in production and logistics chains of various products, including metallurgical and agricultural. Is it possible to carry out similar work with mineral fertilizers?
— Of course. It is advisable to start with test batches and then introduce the system along the entire production and logistics chain. Usually the whole process does not take more than three months.