If you put a map of war-torn Eastern Europe in front of a group of U.S. plastics compounders, they'd shake their heads and wish they were as unified.
It's not that compounders are at war with each other, it's just that there are so many different kinds of companies in their ranks. Major resin makers produce mass commodity grades, independent compounders do more-specialized work and toll compounders fill an important processing role.
Different product mixes also divide the field. PVC compounders might not talk shop with makers of filled and reinforced compounds. Thermoplastic elastomer producers don't necessarily compete with color compound makers for market share.
But officials from all walks of the compounding life agree their business is growing, a process that creates new challenges on an almost daily basis.
``I don't know if it's more difficult to compete, but I think the players are definitely bigger,'' said Terry Haines, president of A. Schulman Inc., a major international compounder based in Fairlawn, Ohio.
Consulting firms Phillip Townsend Associates Inc. of Houston and Frost & Sullivan of Mountain View, Calif., each identified this trend and many other issues affecting the U.S. compounding industry in separate market studies released in April.
The Townsend report analyzed 387 North American compounding sites operated by 65 parent companies. It established an average industry sales growth of 9.1 percent between 1995 and 1996, but also pointed out that almost half of the sites reported no volume growth in that time period.
Frost & Sullivan took a wider angle, dividing the market into PVC compounds, color compounds and concentrates, reinforced and filled resins, blends and alloys and TPEs. It then identified trends in each sector and listed overall market leaders based on 1997 sales.
Frost & Sullivan projects that U.S. compound consumption will grow from 9 billion pounds in 1997 to 12.7 billion pounds in 2004, and sales will jump from $8.7 billion to $14 billion.
Those totals represent a 5.1 percent annual growth rate in consumption and a 7.1 percent annual increase in sales.
Growth and consolidation
Both the Townsend and Frost & Sullivan reports predict that consolidations, mergers and acquisitions will continue to affect the market.
``The compounding market is very fragmented,'' Frost & Sullivan chemical analyst Venkat Ramanujam said in a recent phone interview. ``There are a lot of players in small businesses that probably won't have much of an impact in the future.''
``The market's always been fragmented because entry levels are very low,'' a Townsend spokesman said. ``For a few million dollars, you can get set up with a nice compounding plant.''
In the past nine months alone, Geon Co., a PVC maker and compounder in Avon Lake, Ohio, has almost doubled its share of the PVC compounding market by acquiring Occidental Chemical Co.'s compounding business and compounder Synergistics Inc. of Mississauga, Ontario.
Geon's combined compounding assets now rank first in the U.S. market with a 9 percent share, according to Frost & Sullivan. That ranking was based on sales of compounded resin in 1997, adjusted to include Geon's recent acquisitions.
Other major deals completed since late 1997 include Spartech Corp.'s $135 million purchase of Polycom Huntsman Inc. of Washington, Pa., and Georgia Gulf Corp.'s acquisition of North American Plastics of Madison, Miss. The latter move gives Atlanta-based Georgia Gulf control of 15 percent of the U.S. PVC compounding market.
Overall, Georgia Gulf holds 3-4 percent of the U.S. compounding market, Frost & Sullivan said.
These consolidations already are affecting business strategy, as witnessed by Dow Chemical Co.'s recent decision to form a separate engineering compounds platform and add capacity in that area.
Dow officials said the move was fueled partly by mergers and related moves that have cut the number of independent North American compounders to about 200. Dow believes it can capitalize on this shrinking field of competitors.
``Mergers and acquisitions are a natural consequence of the industry becoming more sophisticated,'' said James Chapman, president of M.A. Hanna Engineered Materials of Norcross, Ga.
The firm is a unit of Cleveland's M.A. Hanna Co., which has made more than two dozen acquisitions since entering compounding in the mid-1980s.
``[Consolidation] is also proving the higher leverage of technical support,'' Chapman added.
Smaller U.S. compounders will continue to consolidate in the near future, said Les Goff, manager of custom engineered products for GE Plastics of Pittsfield, Mass.
``A lot of larger compounders will look at opportunities to expand in areas they don't have,'' Goff said. ``It will depend on the vision of the company and how high they are on the food chain.''
The existence of Goff's division is in itself proof of ongoing industry specialization. It was formed in 1996 to handle the growing number of requests GE was seeing for high-end, high-performance grades of its engineering resins.
But consolidations shouldn't be viewed as a desire to exit the industry. ``Just because a compounder consolidates doesn't mean he's not going down the street and starting another compounding business,'' a Townsend spokesman said.
U.S. auto sales for 1998-2000 are expected to be slightly lower than the 1997 level of 15.2 million vehicles. This trend has caught the attention of U.S. compounders, which send 26 percent of their product into the automotive market each year.
``We're anticipating a flat build in automotive, so we're focusing on growth in the penetration of the vehicle,'' Goff said. ``We can go into exteriors and fenders with a lot of engineering thermoplastics.''
Schulman, which holds a 3-4 percent market share, according to Frost & Sullivan, has set an aggressive growth target for automotive applications in spite of the ``no growth'' outlook.
Haines said Schulman would like to increase the amount of plastic compounds used in each U.S. car from its current 13-131/2 pounds to 14-141/2 pounds, a 7.5 percent increase, by 2001. Five years ago, that total was only 8 pounds, Haines said.
This goal could be met through increased use of compounds based on nylon and other engineering plastics in under-the-hood applications, Haines added.
Officials at LNP Engineering Plastics are equally optimistic. Frost & Sullivan assigns LNP of Exton, Pa., a 1-2 percent share of the market.
``There are a lot of brand-new applications, like van door closures, that can make up the difference for slower growth,'' said Robert Findlen, LNP's marketing director. ``And there are other [nonplastic] products that have gone through their life cycle and need the lowest-cost material.''
Comeback in the kitchen
The Frost & Sullivan study also identifies slow growth in the appliances market, which consumes 13 percent of compounds, as another potential challenge for compounders.
The market is expected to grow only 3 percent per year through 2004, according to Ramanujam.
Going into 1997, the Association of Home Appliance Manufacturers expected an increase of less than 1 percent in 1998 shipments, with sales of such large appliances as freezers and refrigerators actually decreasing.
But through May, the industry was defying that bleak outlook, as shipments were up almost 10 percent. The surge included double-digit growth in refrigerators, freezers, washers and dryers.
Officials at Ferro Corp., a leading filled and reinforced resins maker based in Cleveland, back up the unexpected increase. Jay Finch, Ferro plastics vice president, said a new washing machine concept from Maytag is the most exciting thing for his company right now.
The front-loading washer allows customers to use 18 gallons of water instead of the standard 60 with each wash load. More importantly for Ferro and Finch, each new machine contains 17 pounds of Ferro's glass-filled PP compounds.
Finch said the new washer has enjoyed strong sales even though its $1,000 price tag breaks the appliance industry's previous three-digit barrier. Competitors such as Amana and General Electric have introduced or are developing similar models.
``The appliance industry is fairly conservative, but this is causing people to go back and rethink price points,'' Finch said. ``[Appliance makers] have seen this and called us to ask what they can do with our material.''
Niche vs. mega players
In the Townsend study, 40 percent of the compounding plants listed processed less than 20 million pounds of resin per year. But with rampant talk of consolidation, it's only natural to wonder about the role small compounders will continue to play in the industry.
``There will always be a place for niche compounders,'' Haines said. ``But if you're doing business with GM, Ford and Chrysler, a full-service company can more easily supply product.''
Larger compounders can be more cost effective than smaller businesses in reaching a broad range of customers, according to V. Lance Mitchell, vice president and general manager of Geon's compounding business.
``Small vinyl compounders pick one market and one set of customers and focus on one area,'' Mitchell said. ``Our challenge is to meet diverse markets, focus on our customers and bring them our technology.''
But this diversification can bring its share of problems, according to Michael Day, president of Michael Day Enterprises, an engineering resins compounder in Wadsworth, Ohio.
``As entities merge, they may pick up efficiencies of scale, but they also can build a more cumbersome organization,'' said Day, whose firm's annual sales are about $30 million. ``Their service can suffer as a result.''
Veronique Le Du, national sales manager for Copley, Ohio, compounder Multibase, agreed with Day, saying some larger compounders have grown so much that they literally can't afford to work on smaller accounts.
``Our advantage is mainly flexibility,'' said Le Du, whose company generates annual sales of $24 million, primarily in thermoplastic elastomers. ``If a customer requires a slight change in a product, we can do it in less than a month, but some large compounders don't want to do it at all.''
Along for the ride
Commodity plastics compounders are somewhat insulated from the commodity resin business cycle — which is currently in a trough period of oversupply and decreased prices — but they still feel some of the impact.
``Compounding growth isn't necessarily a mirror of PVC resin growth,'' Geon's Mitchell said. ``They've got different growth rates because the compounding business is reaching a more diverse set of markets.
``Compound prices will go in the same direction, but the change won't be as significant,'' Mitchell added.
For example, PVC compound prices have dropped only 2-3 percent this year, according to Mitchell, while resin costs have dipped almost 10 percent.
But resin's rocky road — and some fallout from Asia's economic woes — are hitting some of the bigger U.S. compounders. Hanna and Geon have announced lowered expectations on second-quarter profit, with Geon citing PVC overcapacity and a failed resin price increase and Hanna blaming volume softness in compounds for the automotive, wire and cable, and building products markets.
Schulman's second-quarter sales were down slightly, with Haines commenting that competitive price pressures will make it difficult to generate additional margin improvement in the second half of 1998. Schulman recently laid off 28 workers at its Orange, Texas, plant because of slow sales in the automotive market.
``Broadly speaking, the chemical industry is seeing weaker earnings,'' Hanna's Chapman said. ``That's generally what's driving all of us.''
Some of the changes the compounding industry is going through are more subtle. Changes in the way compounders perceive themselves and their role in the overall plastics industry are reshaping long-held assumptions.
``I think we'll see compounders do more partnering with large resin makers in more long-term deals than before,'' Haines said. ``They'll be partners in a shared vision and not just be dependent on who's got the cheapest price by a penny.''
Independent compounders also are stepping out from the shadow of major integrated polymer producers, moving out of what LNP President and Chief Executive Officer Robert Schulz called ``an undistinguished second-class niche.''
Schulz addressed the changing market in ``The Plastics Agenda America 1998,'' an industry annual published by the Society of the Plastics Industry Inc. of Washington.
``Independent compounders ... are unbiased in recommending a particular resin ... and thus can offer design engineers a virtually infinite selection of material permutations,'' Schulz wrote.
And a Townsend spokesman points out a change that may be having the most direct impact on the way compounders do business: Their customers are a lot more educated now.
``Customers know about changes in resin and additive pricing,'' the spokesman said. ``They're not giving their business to the guy who buys the best lunch that week anymore.''