The North American compounding market is exploding in 2001, but not in the style compounders would like to see.
``We're operating on demand microbursts,'' said Lance Mitchell, vice president of plastic compounds and color for PolyOne Corp., the Cleveland firm that ranks as North America's largest compounder. ``There'll be a flurry of activity and then it will slow down again.''
``It's almost like running customer to customer,'' Mitchell added. ``There may be a strong PVC order one week, and then the next week, the air's out of the balloon. There's no consistent pattern here.''
A broad lineup of compounding executives tell the same story. Sales were flagging 5-10 percent in the first half of 2001 as customers cut their orders back to bare minimums. Recent-quarter sales were flat or down at publicly held compounders PolyOne, A. Schulman Inc., Ferro Corp. and Spartech Corp. as inventory backed up throughout the supply chain.
Resin sales to compounders, as tracked by the Arlington, Va.-based American Plastics Council, also were down anywhere from 4-31 percent in the first four months of the year.
The slowdown also has taken its toll on facilities and jobs in the past nine months. PolyOne is closing seven plants and eliminating 265 jobs, with several more plant closings expected as part of a major restructuring. Schulman, based in Fairlawn, Ohio, has cut 120 jobs by closing several sales offices and a major plant in Akron, Ohio.
Clayton, Mo.-based Spartech scaled back production in Goddard, Kan., and Dorval, Quebec, eliminating about 75 jobs. LNP Engineering Plastics Inc. cut 13 jobs from its Exton, Pa., headquarters, marking the first time the firm has taken such action in at least 20 years.
There are still some expansion projects out there. PolyOne is investing $12 million in four plants, creating as many as 65 jobs, while Spartech and LNP each plan to open plants in Mexico later this year.
In the past 18 months, Schulman has installed two new engineering resin lines in Mississauga, Ontario, and two engineering resin/color lines in San Luis Potos¡, Mexico, and replaced an older engineering resin line in Nashville, Tenn. Plastics Color Corp. of Dayville, Conn., also spent $1.5 million to refurbish several lines in Asheboro, N.C., last fall.
But such projects have been overshadowed by a climate in which operating rates are estimated to be about 70 percent - well below the 80-85 percent rates that reflect a healthy compounding field.
Measuring the slowdown
``There's no doubt the industry is in a substantial slowdown,'' said Schulman President Terry Haines. ``We've seen some comebacks in customer orders in the last 30-45 days, but things are slow across every market.
``It's especially drastic in automotive, which makes up half of our business in North America,'' Haines added. ``From January through March we saw an inventory correction through the whole supply chain. Auto builds are picking up, but automakers went through a heavy inventory correction.''
Jay Finch, Ferro senior vice president, doesn't see an upturn in the near future.
``Unfortunately, I don't think there will be much change in the next two calendar quarters,'' Finch said. ``And if unemployment continues to rise, it could have a major effect on consumer confidence and customer orders. When you realize your neighbor down the street is out of work, you start to pull in your horns.
``The consumer has been carrying the economy. That's especially obvious now when we see no capital investment going on.''
Belt-tightening in plant operations and corporate spending also are becoming more evident. LNP has shortened its plants' seven-day work week to six- and five-day weeks, then to a four-day week in an attempt to reduce costs without letting people go, according to LNP-Americas President Richard Burns. Color compounder Ampacet Corp. of Tarrytown, N.Y., has been managing the effect of the downturn by decreasing inventory levels, curtailing all-but-necessary capital spending and decreasing all discretionary expenses, Vice President Robert Fielding said.
Compounders also have been challenged by a lack of solid economic data, said Spartech Executive Vice President George Abd.
``It's been difficult for our customers to get good demand information,'' Abd said. ``We're always asking them about `visibility,' as far as how much material they expect to use for the quarter, but now they can only predict about two or three weeks out.
``There's a lack of forward-looking information. An automotive molder isn't going to know when Ford's going to close down their plants.''
``We're seeing a level of pessimism I haven't seen in the plastics industry in 10 years,'' added Dwight Morgan, president of Accel Color Corp., a specialty compounder that operates 13 lines in Naperville, Ill., and Avon, Ohio. ``There's been some pickup in the last month, especially in remodeling applications for the construction market, but we're not sure if that's seasonal or part of a wider comeback.''
The current challenge is bringing things back to basics at Schulman, according to marketing manager Gord Trimmer.
``A lot of us are selling on customer relations right now,'' Trimmer said. ``To get new business, you almost have to leave money on the table or bring some kind of new technology.''
And even those customers who are outwardly positive aren't necessarily reflecting it in their invoices.
``Customers are saying they think the worst is behind us,'' said Plastics Color Corp. President Raymond Lachapelle. ``But they're still putting orders off into the future.''
Lights in the darkness
In spite of the dampened business environment, compounders are forging ahead with a slew of new materials in production and development this year.
LNP's Burns reports that his firm is seeing development interest in new colors for medical applications and a composite material used in golf club heads. Mitchell said PolyOne is working on an alliance with a resin maker that would broaden PolyOne's presence in engineering resin compounds. Mitchell declined to offer details, but said the proposal could include new technology and provide the resin maker with a means of outsourcing its compounding.
Some other new PolyOne products that might provide a silver lining for 2001 include its thermoplastic elastomer compounds, low-smoke PVC compounds used in silicon chip-making equipment and Ecomass-brand tungsten-filled polymers that are being used as a lead replacement.
Elsewhere, PolyOne is producing new carrier systems for pigments in PET and PVC.
Mitchell said the products are a direct result of combining technology from Geon Co. and M.A. Hanna Co., which merged to form PolyOne last year.
``The carrier systems are really a product of Hanna's color work and Geon's knowledge of blow molding,'' Mitchell said.
Ferro's Finch also sees a little sunlight in the shadows.
``The slowdown gives us an opportunity to revisit our polypropylene materials vs. what we consider overengineered engineering-resin applications,'' Finch said. ``We can offer less-expensive raw materials going into appliance housings that are currently using polycarbonate or nylon or ABS.
``Appliance makers are going to take a real hard look at the properties they need in their products and decide what's on the `must-have' list and what's on the `nice-to-have' list,'' Finch added. ``This is basic blocking and tackling. We're going to get more involved with our customers in areas like design help and tooling.''
Plastics Color Corp. even has stepped outside of the compounding venue to boost its profit, adding a film extrusion line in Dayville to make T-shirt bags and other film products.
PCC has operated a similar line at its Asheboro site for at least 10 years to produce custom colored film, PCC's Lachapelle said.
Spartech's Abd and Accel's Morgan each said they have noticed continued strength in packaging.
``Consumer-driven products like water bottles, picnicware, outdoor products and seasonal-type stuff are doing well,'' Morgan said.
Packaging firms also have provided steady business for compounders, since they typically don't carry a lot of inventory and need to reorder often, Abd said,
Niche vs. niche
The slowdown also has led major, multimaterial compounders and smaller regional color houses and specialty compounders to highlight the differences between what each can offer to plastics processors.
``Our size and scope has helped us out, since we're a very diversified supplier,'' Spartech's Abd said. ``We do color and toll work and that helps insulate us a bit when automotive is down.''
Mitchell said PolyOne's relationships with resin makers and its broad product mix also have helped the firm smooth out some bumps in the road.
Meanwhile, small to midsize firms still hype speed, speed and more speed.
``We still have advantages over larger players,'' said PCC's Lachapelle, whose company posted sales of almost $70 million last year.
``We can get an order through our system in three hours and knock off color matches in three days instead of in a week or two. It takes two to three days just to get your order through at one of these giant compounders,'' Lachapelle said.
Even among the megacompounders, lines are drawn between the privately held and publicly owned tribes.
``Because Ampacet isn't a publicly traded company, we can afford to focus on the customer while our publicly traded competitors are forced to focus on themselves and their bottom lines,'' Fielding said.
Margaret Bauman, president of consulting company G.H. Associates in Lebanon, N.J., said that although processors generally prefer larger compounders because of the variety of services they offer, smaller, independent firms could have an edge in some areas during a market slowdown.
``Independent compounders could have an advantage in that they're not sold on promoting one resin or another,'' Bauman said. ``They're not reluctant to suggest a rival material.
``If a compounder has a true handle on costs, he can tell his customer what the best time to switch will be. For some products like housewares and consumer goods, you can switch between PP and ABS and PS without having to make tooling adjustments.''
But another slowdown trend could prevent some resin from making it to outside compounders in the first place.
``In a slowdown, resin firms may pull more compounding back in-house so they can add volume and run their plants more efficiently,'' Bauman said. ``It can help them make up for a loss in resin sales.''
Matter of perspective
Compounding veterans said the keys to making it through the downturn will be staying focused and keeping things in perspective. But that may be easier said than done at some firms.
``Part of the problem is that a number of people in our industry haven't seen this before,'' LNP's Burns said. ``Personally, I've seen these kinds of cycles a number of times since the late '70s. You don't want to panic. Chasing competitors' business just for the sake of market share is a poor short-term strategy.
``But some of our younger guys are getting all nervous, and I'm saying, `Hey guys, just relax. It's not Armageddon, it's just a storm.' ''
Schulman chief Haines is taking a similar approach.
``I can remember when there was a big boom in the stock market in 1984 and 1985,'' Haines recalled. ``There was a segment on 60 Minutes where they were interviewing these young stockbrokers and executives who said the boom would never end. Well, it ended, and now it's ended again.
``Plastics is a tough market. We've just got to try to do what we can to meet the market's demands.''
