with Dato’ Kho Hui Meng, President and Managing Director, Vitol Asia Pte Ltd.
Vitol Asia is obviously an important subsidiary within the Vitol Group, not only for the oil trading business but also for commodity trading, upstream business in the Philippines, participations in the terminal industry and so on. Today, Asia is the region leading the global recovery and is home to many important energy consuming countries such as China, India, Indonesia, Korea and Japan. How is this Asian growth reflected within the company?
It first needs to be clarified that Vitol Asia consists of two parts. Vitol Asia Pte Ltd is the legal entity which is a Singapore domiciled trading company while Vitol Asia represents the more generic geographic area within the Vitol group. The growth in Asia led by China and India is obviously very apparent today. As far as Vitol is concerned, the company has already been present in Singapore since 1979 and has experienced how the business has grown in this part of the world.
The increasing importance of Asia has not occurred as an overnight event. The shift took place around 1991 when Singapore realized that many trading countries were based in the country but not yet trading under Singaporean flag. By cutting taxes to ten percent, the government successfully convinced international companies to have their subsidiaries registered in Singapore. Vitol was part of the pioneering group of companies to take up this offer and thus ended up with two entities in Singapore. One is the historical Vitol Singapore which is not more than a service company while the main subsidiary is Vitol Asia Pte Ltd. Ever since that shift, the company migrated its Eastern businesses into this main entity.
While revenues depend on the market fluctuations, on average, Vitol Asia Pte Ltd accounts for 20 to 30 percent of the Group’s total. The growth of Vitol in Asia in fact already started with China’s export push in the early 1980’s, when the nation became a major exporter of crude oil, gasoline and diesel. That is how Vitol as a company saw the role of Singapore in storing these products which subsequently lead to more ownership and eventually a subsidiary in the country. Overall, Asia has been at the forefront of Vitol’s operations since the early 90s.
In the oil trading business, it is the marginal barrel that really counts. While world demand lies around 86.5 million barrels per day, most of this is based on point A to B deliveries. It is that last barrel that determines whether the market is stronger or weaker and Asia is currently the growth area providing that last barrel of demand. Vitol therefore needs to be part of this growing importance of the region, not purely to do business but also to know how the market evolves will unavoidably affect the rest of Vitol’s business worldwide.
It is interesting to see that many are now focused on China because of the country’s impressive growth rate. But in the oil trading space, India is more interesting than any other country in Asia. China tends to import raw materials without exporting them again. India on the other hand, imports, processes and exports again. This two-way traffic offers more potential from a trade perspective. This explains why Vitol has been present in Mumbai since the early 90s.
Another often forgotten Asian country is Indonesia. Indonesia is in fact a very important market importing 13 to 15 million barrels of crude oil every month, as well as a roughly the same amount of petroleum products. Without Indonesia, Singapore would be struggling. But unlike China, Indonesia currently does not have the financial resources to build its own infrastructure. While Indonesia might consider building two world-class refineries to capture the shortage of 700,000 barrels per day it faces at the moment, it would take seven years to build such infrastructure. By that time, there would already be new shortages creating the need for further investment. Another interesting aspect of Indonesia is the country’s importance in the coal space. Coming in second as the largest exporter of thermal coal, Indonesia offers a great deal of opportunities to the trading industry.
The global financial crisis has most likely affected the revenues of oil traders more than any other industry?
I do not think so. The panic during that period passed quite fast here in Asia. Vitol did not experience any problems in obtaining financing from banks. In fact, Vitol’s concern came when the market was overly bullish and the oil price increased to USD 147 per barrel. That is when business became much tighter.
Nevertheless Mr. Ian Taylor, President and CEO of Vitol Group, stated that 2009 was very tough while 2010 would become even harder. Mr. Taylor argued in favor of diversifying into other types of activities. How does that reflect on Vitol in Asia?
Back in the 90s, people said the same thing. When Mobil and Kuwait Petroleum went into oil trading, everyone thought the market would become extremely tough. But these concerns slowly vanished. Today’s market trend is nothing more than another part of that cycle. Vitol is a trading company, meaning that it has to continuously seek new opportunities even when everything goes well. The trading industry can be very competitive and aggressive, creating a short lifespan for a particular trade. Furthermore, the industry has become so global and transparent that it is now crucial to remain a step ahead of the competition. In the current context, there is no doubt that the first quarter of 2010 was very tough for the industry, with an increasingly unpredictable market and a mismatch between what happens on the financial side of the industry and the core fundamentals of the business. Trading companies need to adapt and understand what drives the different markets. When the financial market is thriving, it is of interest to acquire additional skills to address that market, while building on the core competencies acquired from physical oil trade.
What is driving the market right now? Is there a new paradigm?
For the past two years, the driving force has been the financial market. This all has to do with expectations on how the market will grow or contract, on currencies, economic indicators from the USA and so on. Nowadays you will find traders trying to correlate the oil price to US Dollars which is something which would have never happened long time ago.
What does Vitol advice its traders in terms of the pertinent market factors they should be following?
At Vitol, management does not normally dictate its staff what to do in their daily trading strategies. It hires professionals who know what they are doing. Management spend a lot of time and effort to locate the right professionals to hire and nurture. Management tries to provide the right environment for its traders to thrive and focuses lots of attention to risk management. Because of the global and multi-product nature of the company, many of the different positions will often contradict themselves. This is interesting because at the end of the day the consolidated risk profile become very small. People sometimes ask the company what the oil price will be tomorrow, a question Vitol cannot answer to. The company makes money from optimizing its logistics every other day. This can be done by speeding up the vessel, slowing it down, increasing its load and so on.
You have been with Vitol for 23 years and you have been heading the company in Asia for 11 years. Has it drastically changed?
When I left university, my first position was with ExxonMobil. At that time, trading did not quite exist yet. I remember that people were trading petroleum products on Singapore oil majors’ postings. Every month, five or six oil majors would announce their oil prices so people simply tried to predict the monthly price. Buying a cargo of diesel during those times, an end-user would be given a week to consider the price offered. This is how it all started. In the meantime, the speed has changed drastically with different market movements being observed simultaneously.
Many comment that traders usually take up a trading role for a number of years and as soon as they are around forty, they move on to another business. Your job has drastically changed from trading to maximizing logistics. How have you adapted to this as a manager?
My job is very psychological in nature. First of all, the company needs to make sure that its people do the right thing and that it hires and allocates the right people to the right role. It is essential to understand the staff within the company. It is important to understand how people react under pressure, how they interact with their colleagues, with customers and how they carry out their trade. When something abnormal is observed, good manager will ask the right questions to understand the reasons for such abnormal behavior. There are a lot of soft elements involved which Vitol finds much more useful than reacting after the event has happened. This is the way in which Vitol and many other companies in its segment differentiate themselves from larger or more structured entities.
Do you see this as one of the reasons for Vitol’s preference to remain private?
Companies that go public to obtain additional funding automatically become much more corporatized with a much shorter term focus, e.g. the quarterly results. This is not necessarily the right setting to thrive in when market do fluctuates and on the human resources front, some companies need to nurture people or business ideas for years before they bear fruits. The pressure of going public is tremendous, without even mentioning the extra manpower needed to comply with all the additional reporting it requires. We need to remain agile in this business.
You mentioned China was not as interesting as India from a trade flow standpoint but it is a fact that no business can do without its market. Not only because the volumes are enormous, but also because of aspects such as the country’s power of negotiation and its different approach to the market. How do you deal with that?
First of all, on a macro level, China is generally a one-way street on the physical flow, but it remains very critical for trading because of the rate of change. It is important to understand what happens in China to know how other geographical areas will respond. To do so, it is necessary to be engaged in the market and feel the pulse.
Dealing with the Chinese market is related more to psychological issues. By turning the clock backwards, one can notice that people once said the same thing about Saudi Arabia when it commissioned the two world class export refineries at Al Jubail and Yanbu in the mid 1980’s. The cyclical nature of the industry is the reason why Vitol traders cannot be dogmatic about market movements. They need to learn how to cooperate. While one trader might seem overzealous in his pursuit of a particular trade today, the same person can become a potential partner tomorrow. Moreover, traders must never forget that downturns will always follow upturns. It is a business that cannot be taken too personally.
China has massive oil companies, extreme liquidities and political decisions backing company strategies. Petrochina is showing signs of becoming increasingly interested in oil trading and is also increasingly active in Africa. Will we see a shift in balance between the major oil traders?
By its sheer size, Petrochina is already a major player in the market. On the petroleum product side however, Sinopec is larger. Once again, this is nothing new. What some people do not realize is that the expansion of these Chinese majors actually creates new opportunities worldwide. The further these companies go, the more help they need in running and establishing their operations in the respective markets. Not a single company in this business is bigger than the market. One of Vitol’s key strengths in this respect is the fact that it is a multinational. It can draw on the learning curve it has already climbed and build on the experience acquired in the various markets during its 44 years of history.
You mentioned there is the political will in Singapore to establish an oil and gas industry, which has been even further reinforced with the start of the Singapore Mercantile Exchange. What are the key advantages that will allow Singapore to keep its position for the coming years?
A lot of credit goes out to the Singaporean government for the successful development of some key industries within the nation. In the past, Singapore has always had the approach to be both forward and outward-looking, learning from overseas and strengthening its domestic economy in a fast and efficient way. A main constraint for the trading industry is the scarcity in manpower in Singapore. But this constraint is in fact a global problem and mainly due to the increasing interest from financial institutions in the oil trading industry. The resulting flow from oil traders to these financial institutions resulted in a shortage of qualified labor supply. Yet again, such pressures are subject to the cyclical nature of the different markets. An advantageous tax system is not the only reason to be active in Singapore, as there are many places with even more beneficial tax rates. A key strength for Singapore is the talent pool of human resources that has grown out of the refining industry. When the first refineries were built in Singapore in the late 60s early 70s, there were a fair bit of people with knowledge of logistics that eventually evolved into traders. At the same time when China initiated its open door policy in the early 1980’s many pundits thought Hong Kong could emerge as an oil trading hub in competition to Singapore. Yet, the early development of a refining industry in Singapore together with the lack of oil know how in Hong Kong, enabled Singapore to take a leading position in the trading industry. Nevertheless, one disadvantage for Singapore was that many traders considered it as a rather dull place, an issue the government has been addressing intensively and of late, we are seeing tremendous improvement with the start-up of the two Integrated Resorts at Resorts World Sentosa and Marina Bay Sands.
How does Vitol give back to society and how does it contribute to forming the next generation?
When the Singapore Management University (SMU) came out with the International Trading Track (ITT), I was rather apprehensive at first because the purpose was to have degree courses in trading. This was concerning because it would not make sense to grant students with degrees in trading. What was more relevant was the fact that ITT created a proper degree with electives in trading. It is not possible to train traders, but it is possible to train those who support trading, such as marketers, logistics specialists, finance experts and shipping professionals. Students that follow this program will know the basics of these different fields and can use those competences as a springboard to a trading position. Vitol is a member of the advisory council of the ITT with the purpose to enhance the interaction with the trading industry and ensure that the curriculum is relevant enough. The council is also a platform to discuss new courses for the program. In addition, Vitol in conjunction with SMU will introduce a Vitol Industry Lecture series over the next 4 years to broaden the Singapore public’s knowledge on issues such as the environment and the energy industry.
What makes a good oil trader?
A good trader is a person that can create something out of nothing. Due to the fast pace of the industry, a good trader also needs to be very hungry and have a strong determination to succeed. One of the key arguments to keep the company private is the binding force among its employees. It is crucial to be perceived as an employer people like to work for and that allows them to grow. Rather than putting obstacles to prevent the employees from leaving, we strive to preemptively address issues that may push people to leave.
Now that Singapore has become one of the richest countries on the planet, how will you find hungry people?
Talent can be acquired from other places than Singapore alone. Besides, Vitol still receives requests from local people coming from less wealthy areas on the island.
If you were to send out one final message on behalf of Vitol Asia to the international readers of Oil and Gas Financial Journal, what kind of message would it be?
Purely on the oil trading space, Vitol has been in Asia for 30 years and the company has always found that Singapore is an ideal environment for trading because of several factors. The government in Singapore has always been very pro-active. The government over the last decade has diversified its thought process from being manufacturing centric to service related industries like oil trading. For oil trading industry in particular, Singapore has the logistics and know-how advantage. It is important not only to look at the total revenue since, most importantly, the trading industry brings a lot of spin off opportunities such as trade finance, oil terminalling, shipping, etc.
The only thing Singapore needs to grow is the fact that all of its independent storage facilities is for petroleum products, not on crude oil. Upon commissioning of the Jurong Rock Cavern storage in a few year’s time, it is my hope that spot leasing will become available thus providing a catalyst for more delivered spot crude oil trading in the Far-East. Recent moves by Saudi Aramco and ADNOC to hire crude storages in Japan and Korea in order to place their crude oil nearer to their markets and the commencement of ESPO crude export from the Russian Far-East will one day make spot delivered crude trading more prevalent in the Asia-Pacific basin and thus stimulate the growth of a future market in an Asian crude oil price marker.
Lastly, for foreign investors it is interesting to look at Singapore as a place where one can feel the pulse of a booming trading industry. The pro-active government, English as an official language and the proximity to Asian growth markets are other crucial strengths of Singapore.