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.

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?

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.

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.

We’re going to see a shift. We are already seeing this, but it’s going to have a long-term impact in terms of what people consider for appropriate safety stocks, what their critical inventories are, how they manage that risk differently. When everything is freely available, you don’t need to keep an inventory. At the moment, things are tightening up, and as we’ve seen, they’ve tightened up for a very long period of time, far longer than most people anticipated. You recognize that the risk is manifesting and you have to deal with it differently.

Risk is something that I’ve been talking with people about as well. In your business and trading business, risk and risk management are inherent. You’re buying, selling products continuously. You’re managing that arbitrage and the polymers markets are seeing increasing levels of volatility and risk. What tactics are you and ITOCHU using to help manage that?

Risk management from the perspective of pricing, the commercial risk. For example, in China. There is a functioning features market, the Dalian exchange, where you can hedge your inventory with a feature for instruments. Sharing in the US or other parts of the world is not yet this is an exchange where you can trade. What we have to do is, sometimes, see. Maybe, it might not be a good correlation. Sometimes we have to manage risk by hedging with different products. The market is going down. I probably have to hedge if I have some inventory that I wanted to hedge.

I sometimes have to sell something, even if it’s the HDPE. It’s linear low density, but I’m grabbing some of those things that I need to have a little position of being able to absorb these variances of sudden shifts that occurs. It’s not perfect because, as we know, linear low density and HDPE totally behave differently. At least it’s not in a big disconnect, hopefully as being completely exposed.

Another is to have options of different sources. Not only the West but also from Asia or from the Middle East. It’s the key point of it because having the ability to source from all the regions gives us that advantage that any contractual obligations we have to fulfill it, either buy side or the sales side, we are able to cover in such a manner. Another aspect is that’s precisely the point about diversifying the sources.

That makes sense. Some of the trends that we’ve been seeing at across the chemical industry and I’ve been having conversations with others about is, this increasing acceleration and focus on sustainability and circularity and increasing focus on digitization and more investment there. I’m interested in how ITOCHU has approached this.

Let’s start with sustainability. I know that it’s important to ITOCHU. You have some specific plans. I’ve read about some activities, but how do sustainability and circularity affect your resins trading in terms of the business itself and choices customers and suppliers? How do you approach sustainability in your business?

I don’t know if it was COVID that brought consciousness to us to see how important it is to stay healthy and to protect our nature. There’s a spike up on sustainability initiatives around the world across different business sectors. ITOCHU, being a global company and image for global corporate citizen, we are under the light to how we are contributing to this society. ITOCHU, there is a strong initiative of going into the sustainability projects.

In 2021, we had our new COO, Mr. Ishii. Victoria, you met him here in Houston. He became the President and COO of ITOCHU Corporation. His theme is to push that sustainability project within ITOCHU in the company.

In the plastic business, our sustainability outlook is we need to participate with our end-users, customers to help them bring that circularity in their business, from convenience stores. They are also in this radar of all their products. Wrapped plastics and those things that they consume, cutleries, and everything, how do they circulate that? One of the things that ITOCHU was doing, for example, is to introduce some of the recycled plastic that comes from the ocean. Our Tokyo office calls it ocean plastics, as maybe a lot of different regions do. Another item is this organization, the ISCC, which regulates the mass balance, as they call it.

This is what post-consumer recycle but that goes into reproducing finished products. They can carry on the quantity that is being fed. The post-consumer recycles it. It is fed into the system and you can pass those credits to whatever finished products that you are making. For example, in this case, we are looking into a lot of those projects that we hear. ExxonMobil announced they’re going to do pyrolysis oil and Shell as well, Chevron Phillips. A lot of those companies have a sign-up for this pyrolysis technology. Those are great because ISCC allows the ability for even recycle products to have the credit to apply in food. Something which can never occur if you do real recycled plastic.

Advanced recycling or chemical recycling, as it’s called, depending on who you’re talking to, does seem to solve a lot of problems in terms of the hygiene aspects of recycled materials. If it’s going through pyrolisis, a lot of the germs, the concerns get burned away, so you’re back to clean materials. That’s, in many ways, what the industry is hoping takes hold and it needs to. That’s going to be the fastest and the most effective to consume all of the plastics that get used on a regular basis.

As you know, we’re all aware, being silent in this business of sustainability is not going to end well because eventually, you will be pointed in the society. Being proactive is very important. For that reason, having the resin trading is fine, but at the same time, we always have to piggyback that solution to our customers and continue to be active in that area.

Being silent in this business of sustainability is not going to end well. Being proactive is very important.

Let’s talk about digitization. How does digitization play out in your business? I know in the early part of the pandemic, there were some statistics that said that across industries would achieve five years of advancement in five months or less. The chemical industry is not known for being super-advanced and in many digital aspects. There’s a lot, but how does that play out ITOCHU and in your business?

Victoria, the next frontier that is going to shape this 3 to 5 years. Precisely, I’m involved in one of those initiatives for digital integration for our company, especially in this plastic business in New York. We’ve looked at digitalization. One of the things that always gives me goosebumps is Thomas Siebel’s book about digital strategy. It says in his title of the book, Survive and Thrive in an Era of Mass Extinction. It’s scary, but it’s true because Amazon, Google, Microsoft and those companies have thrived. They’re entering into areas that used to be the physical world of not software, but now Amazon is in the physical world of online shopping, logistics, trucks, delivery, food. You realize, as a trading company, it feels like there’s a new entrant in our territory.

Resin is next for Amazon if they want to fully integrate the value chains. Is that a choice?

Yes, and they’re incorporating AI to find out this, say customer sentiment through social media of the rep reviews. They’re always seeking that forefront of what makes the people to buy or not buy. This is something that we cannot stay silent about. In one of the courses that I’m taking, they call it, if you do not implement some form of machine learning or AI into your business, you’re going to become a legacy company. Sooner or later, you’re going to fall into that trap of being extinct, eventually. In our company, we are looking into the digitalization of operations, supply chains also. We are starting from there as we are trying to reduce the process. Recall it in the MBA typical than Michael Porter’s there, that strategy looking at local strategy.

Based on that perspective, every single aspect that you can control costs, especially those standardized operations certain customer requests like technical data sheets or some documents have to be made by humans. It can be done by machines if it’s all stored in one place. Digitalization goes into not only planning to have all the information organized but also in a freeform matter so that the machine itself can operate by itself. I do understand that there are limitations. A lot of this machine learning and AI is a concept that for a petrochemical industry, it’s daunting.

We haven’t seen the need for it or sometimes it feels like that maybe is like a fantasy. We see in Amazon and all these like Tesla. I was looking and there’s this company. They do the picture imaging of the farms and agriculture and counts how much soybean is going to be produced this season through satellite imaging. These are now connecting different technologies to the system to be able to get smarter and have less human intervention, more automation. One of the things that we are also looking at, aside from the logistics that what I was saying about, is trying to have what they call the chatbots or those emails bonding.

There are also aspects about customer relationship management. A lot of those customer management also is about integrating your logistics to so that the customer can see where their cargo is flowing. We are collaborating together with a shipping company to try to get their updates of the shipping schedules and the routing, any of those information to be on a platform where customers can quickly see and to be able to instantaneously get that information.

People expect more transparency. We’re used to it in our personal lives and we expect it in our business lives, but you’re right with when you’re moving stuff via ships. This marine freight has been less transparent. This expectation of transparency and creating that.

How do you see leadership? You’ve done very well at ITOCHU, so what’s critical to leadership in your business?

First of all, humility. There’s no good answer. Maybe whatever you think you know, and you have control, it’s good to have some background, but at the same time, you need to be able to be agile to react to different scenarios. We’ve seen this in this pandemic, this rollercoaster ride that every model of business that we have learned from the previous history has totally thrown out of the window. We have to grasp in a different manner how to manage these logistics issues with these shortages and regional shortages and how to bridge the gap of the supply and the demand locations. Another thing is to look at the future that maybe we cannot stay static on just resin trading, buying and selling. We have to give service. We have to be involved in sustainability. We have to be more creative in our system to be more automated.

In some sense of leadership has to do with, first of all, be able to listen, to be able to capture those opportunities of where things can improve, know the epoch and adjust to that. To be able to push that once you have the formulation. Obviously, you need to build that support team, people that from your colleagues, as well as your upper management, you need to get those supports because at the end of the day, even if you’re in this very small corner of ITOCHU Chemicals America in Houston, where we make it here, it could be a pilot or that can be implemented for the whole company. With that vision, you need to be excellent in what you’re trying to do, what your daily work is, and bring everybody on board. Automatically, that leadership figure starts creating. It’s not necessarily because I think I am a leader. No, I happen to be able to cut them and bring this up.

What is next for your business? What market signals are you watching as we go forward this 2021?

There’s a concern about this transitional inflation that the freight has been mentioning. A lot of people are wondering if it’s going to stick or not. At the same time, there’s a lot of heightened fear of stock market now and companies that are doing exceptionally well with multiples that have never seen before. It looks overpriced and stimulated economy. The reality of it is everybody is crunching. These things are not smooth, as we know with this logistics. There’s a lot of people that are getting squeezed, businesses margin, especially like the manufacturing industry, their perspective of price increase would continue to go up if there was roundup inflation.

Now that there’s a concern that it’s going to be tapered, it’s going to be a cool-down, people are going to start normalizing their budgets for buying things. They’re going to start disciplining themselves. When that comes to perspective, they see the light at the end of the tunnel of this musical chair. It’s going to eventually stop. In the meantime, yes, fish stocks are going up. Resin continues to creep up. As we seen, the resin prices continue to announce a $0.05 increase every month.

This is getting a lot of pressure and the margins of the companies. So far, first half of the year, a lot of manufacturers, their financials look great. Part of that is the inventory carry-over that they were able to manage to boost their margins, but looking at the moment where things are going to start curving. The inflation when the fed is going to change that interest rates to increase. That’s going to have a very strong impact on the stock market and confidence, therefore, on the overall economy.

It’s your leading indicator that you are watching now to see how the demand in markets play out.

Honestly, how can you control the container situation? Demand has to stop. Demand stops the moment you start being more realistic. We are still literally too exuberant on this purchasing spree, but it’s getting in hand.

I’ve heard that in some other markets, prices are starting to moderate. I’ve heard lumber, for instance, was extremely high earlier in 2021 and I’ve heard that’s starting to moderate. A lot of that is the US put a lot of its also. There are imports but in different lumber products but it’s moving in different containers. Maybe not via ocean but certainly domestically. We’re starting to see this in some other commodities that there’s some moderation but you’re right. Things have to settle to a certain degree and that’ll help sort out the freight issues and the container issues.

Iron price dropped 40% in one month. A lot of that had to do with China trying to go toward the net-zero policy, they say. At the same time, it’s a huge drop. Commodities are, in many fronts, starting to correct. Even housing, it’s a still-strong housing market, but also it feels there have been some adjustments about the housing start numbers we see. The pricing is stabilized a little bit on the high side because it’s difficult to get the demand, especially like the Millennial sectors, the people that are supposed to be the new buyers of those houses in full-blown into the markets because of the too high price. I see those things like indicators.

We will see where the year plays out and how it goes forward. Leo, it has been great talking with you. I appreciate you taking the time and join us.

Thank you very much, Victoria. Good luck for everybody.

Thank you. Thanks everyone for reading this episode. Stay tuned for more.

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About Leo Maguchi

Leo is a trilingual international petrochemical business professional with 19 years of experience in trading petrochemical products around the world. After graduating from Universidad Panamericana in Guadalajara, Mexico with a degree of International Business Administration, he moved to Houston working for major international trading companies. Over the years, Leo have developed grass-root businesses, innovated and grew existing trading business, structuring alliances and partnerships with companies overseas, and involved in M&A projects around the world. Leo has earned is MBA degree at Rice University with Finance major. Today he leads the plastic section for ITOCHU and he is involved in logistics operations, marketing and sales of plastic resin, and a member of the leadership team in the company’s digital transformation.