By: Frank Esposito
November 27, 2012
AKRON, OHIO (Nov. 27, 10:30 a.m. ET) — As 2012 draws to a close, numerous thoughts are vying for attention in the overworked minds of North American compounding executives.
Sales are up for most of them, but maybe not as much as they’d like. Growth from the automotive and construction sectors has been a pleasant surprise, while areas like packaging and consumer goods have provided steady gains.
But there are also concerns about the impact that a struggling European market and slowing Asian demand could have on their overall businesses. Customers also remain a little skittish following a contentious U.S. presidential election and the country’s looming “fiscal cliff,” which could eliminate tax cuts and impact their businesses as well.
Regional resin execs also can console themselves that they’ll receive heartfelt holiday cards from their resin suppliers this year. That’s because, through September, compounders in the U.S. and Canada had bought more polypropylene, PVC, polystyrene, and low and linear low density polyethylene than they did the year before, according to the American Chemistry Council in Washington.
Compounders’ purchases of high density PE fell about 1 percent, so HDPE makers might just send a holiday email this year. PP makers, on the other hand, might send really nice gift baskets to compounding firms, since sales of that material to compounders were up almost 15 percent — a gain of more than 175 million pounds.
Plastics News recently checked in with some of those busy executives to assess 2012 and see what their expectations are for 2013.
Here’s what they had to say:
Upward in 2012
Sales in the Americas were up 8 percent for compounder/concentrates maker A. Schulman Inc. in its fiscal 2012, which ended Aug. 31. That sales gain was achieved even as sales volume in pounds fell 4 percent. The Fairlawn, Ohio-based firm’s capacity utilization rate in the Americas also increased from 66 percent to 70 percent.
“We’ve completed the first phase of strategic change in the U.S.,” Schulman Chairman, President and CEO Joseph Gingo said. “We had been a volume producer for automotive with materials like talc-filled polyolefins. Now we’ve established our masterbatch business and reactivated our Akron [concentrates] plant.”
Schulman added to its concentrate growth by acquiring McCann Color Inc. of North Canton, Ohio, and more recently by purchasing ECM Plastics Inc. of Worcester, Mass. The firm also “has turned the corner” in its engineering plastics division, Gingo added, and now is running “a niche-type, value-added business.”
North American compounding leader PolyOne Corp. of Avon Lake, Ohio, made a ground-shifting move in October when it bought Spartech Corp. for $393 million. That deal increased PolyOne’s already market-leading share in compounds, and also made the firm one of the region’s biggest makers of plastic sheet.
Through September, slowdowns in Europe had led to global sales drops of 3-7 percent in PolyOne’s Specialty Engineered Materials and Performance Products & Solutions businesses. But nine-month operating income at PP&S — which includes a leading position in PVC compounds — was up 15 percent, while SEM’s third-quarter operating income was up 19 percent, said Craig Nikrant, global SEM unit president.
“We had a challenge with the economy in Europe, but we had a strong third quarter,” Nikrant added. “We grew through a good mix of specialty markets and applications. Europe has stabilized a little bit and we’ve reduced our dependence on commodity markets for big-volume nylon and polypropylene markets. We’ve now got lower volume, but better margins.”
Rob Rosenau, PolyOne PP&S unit president, said most of the drop in PP&S sales is connected to lower prices resulting from similar decreases in raw material costs. “What is masked a bit by this issue,” he said, “is that our overall customer base has seen sales improvements this year that they expect to continue into next year.”
The compounding unit that PolyOne will add as part of the Spartech deal also is having a good year, with sales up almost 13 percent in the nine-month period ended Aug. 4. The unit’s nine-month profit also climbed from less than $300,000 in 2011 to more than $6 million this year.
At Ampacet Corp., a major producer of color and additive concentrates based in Tarrytown, N.Y., President Robert DeFalco said the firm “has had a reasonably good year” in North America in 2012, with sales up 10-11 percent even as its volume in pounds has increased less than 2 percent.
Sales in dollars and volume in pounds each are on track to be up 4 percent this year at compounder Teknor Apex Co. in Pawtucket, R.I. “Each month seems like a bit of a struggle, but when we look back at the end, our business has been quite good,” said Burt Lederer, Teknor executive vice president. He added that, like many firms, Teknor “has wrestled with volatility” in raw materials during 2012.
The market for compounded products at engineering resins producer and compounder Sabic Innovative Plastics in Pittsfield, Mass., “is up in the mid-single-digit range,” said Tim O’Brien, American/European vice president and general manager. “We try to grow with the market or faster.”
Double-digit sales growth in 2011 has been followed by high-single-digit growth in 2012 at color and additive concentrates maker Americhem Inc. of Cuyahoga Falls, Ohio. In spite of this recent success, Vice President and General Manager David Bouton said the firm “is never totally satisfied.”
Up-and-down swings in demand have resulted in compounder and concentrates maker Techmer PM LLC expecting sales growth of 5-7 percent in 2012, according to President John Manuck.
“Our first half was excellent,” Manuck said. “We blew away targets. But then things started to slow in June. We thought it might have been a resin price drop, but there was no bounce back.
“July, August and September were much slower, but October looks excellent,” he added.
But all of the above results pale beside those at compounder Asahi Kasei Plastics North America in Fowlerville, Mich. A resurgent North American automotive market has sales there — in dollars and volume pounds — up 20 percent, according to President John Moyer. He cited abundant sales growth to “new customers and new applications, both in and outside of automotive.”
Auto still climbing
The comeback of the U.S. automotive market has lifted the sales and spirits of North American compounders. After falling under 9 million in the depths of the recession, U.S. auto builds are on pace to top 15 million this year — not far off their pre-recession highs.
“We’ve seen nice growth within automotive this year and are very optimistic about our opportunity with our automotive customers in 2013,” said John Van Hulle, Global Color, Additives and Inks president at PolyOne.
The auto market “is getting stronger, and should continue to do so, as long as the economy doesn’t tank,” added John Jones, owner of JR Jones Inc., a consulting firm in Wyomissing, Pa.
Expectations at Asahi Kasei are for North American auto builds to continue to increase, reaching 16 million or 17 million in the 2015-16 period, Moyer said. Those expectations are a big reason why the firm is adding a large twin-screw line that will increase compounding capacity in Fowlerville by 10 percent by the end of next year. The line will replace an older, smaller line and represents an investment of about $3 million. It will result in the creation of four to eight new jobs, he said.
The auto boost also led Asahi Kasei to go to a seven-day production schedule earlier this year for the first time in its history. That move allowed the firm to add 20-25 production jobs. Nylon compounds in particular are replacing metal in parts such as engine mounts and pedals, Moyer said.
And even though Schulman has moved away from commodity-type automotive materials, that sector remains the firm’s second-biggest market.
“We’re seeing more of our materials used in interior trim, steering knobs and other uses in higher-end cars,” Gingo said.
“Midrange cars also are adding classy features that use lots of plastics. There also are a lot of under-hood parts being developed in plastic — it’s not just ornamental.
“We’ve benefited from automotive as much as anyone else.”
At Sabic IP, O’Brien said lightweighting of auto parts continues to drive opportunities for that firm’s long-glass-fiber Stamax-brand PP compounds and other plastics to replace metal. “We want the first 6 inches and the last 6 inches of the car — bumpers and taillights,” he said. “There’s also tremendous opportunity on doors and steering wheels.”
Automotive has been the strongest growth area at Americhem this year. “More people are buying cars, and that means more interior trim and instrument panels,” Bouton said. He also identified a trend toward “interior harmonization,” where automakers want “an all-harmonized look.”
“They want nylon knobs and other plastic parts to blend with the aesthetics of the car,” Bouton said. “Plastics are still taking their share in automotive.”
Automotive also has boosted sales at Teknor Apex. “The market’s being driven by pent-up demand,” said Lederer. “As people feel more confident, they’re likely to buy a new car. It’s easier than buying a new house.”
Outside of automotive, the building and construction market also has enjoyed a bit of a comeback for compounders in 2012. After years of struggle, U.S. housing starts have rebounded this year and are on pace to total almost 750,000 — a 20 percent jump from 2011.
That’s good news to Rosenau at PolyOne. “Our PP&S business is so closely tied to building and construction activity that this is the key end market driving growth,” he said. “To get a little more specific, we have seen visible growth this year in markets like pipe fittings, wire and cable, and major appliances.”
Building and construction sales have shown “a bit more life and energy” at Teknor Apex, Lederer said.
“We’re cautiously optimistic on construction for the first time in a while,” said Bouton at Americhem. “High-end decking was wood, but now it’s going to cellular PVC. That’s a residential product.”
PolyOne’s Nikrant added that construction-related wire and cable sales are doing well for his firm’s SEM unit in the U.S. Demand for infrastructure products also could increase as the East Coast recovers from the impact of Hurricane Sandy, he said.
Also at PolyOne, Van Hulle said his unit “is seeing positive signs and is positioned to enable customers to take full advantage of the inevitable upswing to come in that market.”
In packaging, use of compounds has increased even as the overall U.S. economy putts along with gross domestic product growth of less than 2 percent.
“We’re seeing a lot of activity in food packaging,” Schulman’s Gingo said. “Even if you don’t put gas in your car, you’ve got to get something to eat.”
Schulman has seen strong growth in meat packaging, as well as in color concentrates used in packages ranging from detergent bottles to dental products. At Ampacet, DeFalco said his firm “has seen some really good transfers in rigid packaging” in both blow molding and injection molding.
Sales into non-durable packaging have improved at Techmer, but Manuck said industrial packaging sales “still aren’t so strong.”
Other markets also helped compounders grow to varying extents in 2012. At Sabic IP, consumer electronics “have made a bit of a comeback as production came back from overseas,” O’Brien said. The medical market also has been good for Sabic IP’s compounds in 2012, with growth in medical devices used for drug delivery and in-home health care, he explained.
Clear flame retardants also have provided Sabic IP with “big growth” in consumer electronics, according to O’Brien.
PolyOne’s SEM unit “made a big leap in LED lighting” during 2012, according to Nikrant. And in May, the firm dedicated a team focused on health care. That group can use PolyOne’s entire portfolio to meet demand in health care, where Nikrant said sales are growing at a double-digit rate.
Lawn and garden and industrial-type applications have helped Altera Polymers LLC in its first full year of business. The Seneca, S.C.-based compounder was founded in 2011 by industry veteran Barry Rhodes.
Growth vs. uncertainty
Any potential business uncertainty hasn’t caused North American compounders to slam on the brakes and stop growing their businesses.
In March, Altera bought the dispersions business of Lancer Dispersions Inc. of Akron, Ohio. The business does small-lot color concentrates work, and works with thermoplastic elastomers.
Altera also recently started its third production line and went to a 24-hour, five-day production schedule. The firm expects to add 20-25 production jobs next year.
“We’re taking business away from the big guys who are taking their eye off their customers,” Rhodes said.
Americhem has added several production jobs and increased capacity by 10 million pounds — about 25 percent — since opening its plant in Liberty, N.C., in 2011. Companywide, Americhem has completed eight capacity increases in the last five years.
“The goal is to stay ahead of the market,” Bouton said.
Teknor Apex plans to meet needs for new capacity by debottlenecking as needed, Lederer said. The firm also opened a new production line last year at its plant in England.
By the end of the year, Ampacet will have opened a 44 million-pound-capacity plant making white and additive concentrates in Dudelange, Luxembourg. DeFalco said the firm had run out of capacity in Europe and needed to increase its ability to make commodity products.
Techmer will embark on a 10,000-square-foot expansion in Clinton, Tenn., next year that will include new high-speed lines and a testing lab, while eliminating some older capacity. Companywide, Manuck said capacity has increased 10 percent in the last 12 months.
And early next year, color compounder and concentrate maker Penn Color Inc. of Doylestown, Pa., will begin producing liquid color products for the first time. The firm will launch liquid color production on a trial basis during the first quarter, said thermoplastics industry manager Robert Kaminski.
“Our customers have been asking us for liquid color,” he added. “It’s a piece of the market that’s always been there.”
Less resin, more color
One intriguing challenge faced this year by Penn Color and other color and additive concentrate makers has been a shift in content ratios caused by product redesign.
“There are a couple of factors here,” Kaminski said. “Thinner parts need to look the same as they did before, so that leads to higher color usage. You need more colorant to get the same effect. Then you’ve got to factor part shrinkage and warpage into that reformulation.”
This situation has caused some Penn Color customers “to shy away from white a little bit,” he added. Big price increases in 2010 and 2011 for titanium dioxide — a common whitener — also shifted business away from that color, according to Jones at JRJ.
“Customers aren’t using white as much as they normally would,” Jones said, adding that TiO2 prices have come down lately. “They’re choosing between clear or white or using a label.”
At Schulman, Gingo said the firm has seen a similar change in customers using clear containers for dental floss instead of traditional white. Lederer agreed that at Teknor Apex, “a lot of white in packaging has gone to clear.”
“On pricing, the net can be a wash when you downgauge,” said Bouton at Americhem. “You still need to cover the product, so less resin could mean more colorant, or in a higher concentration. You’re using it the same way.”
Techmer’s Manuck agreed that “quality becomes a bigger issue” when products are redesigned. “In some cases, you want to take color out and that can change how a material processes,” he said. “Either way, it can lead to additional work, and that’s good for us.”
The word from compounding customers has been one of cautious optimism, because of uncertainty about the “fiscal cliff” — a series of expiring tax breaks and budget cuts that could hit the U.S. in 2013 unless Congress can agree to intervene.
Slow economic growth also is affecting customer outlooks.
“As a business person, I’m disappointed that a few years post-recession, we’re still scratching our heads about what’s going on,” Techmer’s Manuck said. “Because of the fiscal cliff, confidence in Washington is more negative.”
“A lot of customers were waiting until after the election to make investments,” added Rhodes at Altera.
“They’re not spending a lot of money on capital investments. Some are buying equipment, but they want to see where taxes are going.”
Nikrant was a bit more upbeat at PolyOne. “When you look at ongoing sales, there’s a little bit of hesitation because of the economy, the political situation and taxes,” he said. “But we’ve got a pretty strong backlog of orders to work on. Hopefully, that will lead to positive progress. We’re pretty optimistic.”
At Penn Color, Kaminski said he’s seen “a very tentative, wait-and-see attitude” from some customers.
2013 is calling
Predictions of a slow U.S. economic comeback in 2013, and possible recession in Europe and slowing growth in Asia, are leading many North American compounders to temper their expectations for 2013.
“We’re seeing sluggish growth overall,” Schulman’s Gingo said. “There’s more upside than down, but the growth rate is still tepid.
“But things have grown a little optimistic in 2012. Customers have moved away from one-month projections to two and three months. That reflects confidence.”
Manuck expects slower growth of 1-2 percent at Techmer in 2013. At Teknor Apex, Lederer said the firm might be challenged to match its 4 percent 2012 growth rate in 2013. A mid-single-digit growth rate is “very possible” for Sabic IP in 2013, O’Brien said.
Growth of some form, even in low single digits, should be seen at regional color compounders and concentrate makers. When Jones did a multiclient study of 46 such firms in 2012, he found that all but one of them had sales growth in 2011.
“The talk is that 2013 will be down,” added DeFalco at Ampacet. “But they said that for 2012, and we’re holding our own.”
The right attitude
Call it a drive to adapt or survive or something else, but whatever it is, longtime compounding execs have it.
“What’s really driving improvements are application developments for new products,” said Lederer at Teknor Apex. “Customers are more receptive to new ideas than they were a year ago, and I think that’s because they’re healthier. They were more focused on the now, but now they’re more into new products.”
“We take base resins and add magic to it to meet requirements,” PolyOne’s Nikrant said. “We don’t spend a lot of time on something like 33 percent glass-filled nylon, because a lot of people do that. We’re developing applications with the customer at our side.”