After a tough year in 2001, the U.S. compounding market should grow by 3-5 percent this year and by a total of almost 30 percent by 2007, according to a new market study released by consulting firm Frost & Sullivan of Mountain View, Calif.
The study also concludes that resin makers will move more compounding in-house during that period, creating a challenge for independent compounders.
``Resin makers are placing more emphasis on compounding since their upstream profit is eroding,'' Frost & Sullivan analyst Vivek Tapuriah said. ``They're looking to develop niches, establish brand identity and increase customization of their products.''
Tapuriah - who previously worked for oil, chemicals and plastics maker Reliance Industries in Bombay, India - added that resin makers will focus on specialty and engineering materials as they ``look more at margins instead of volume.''
Officials at several major compounders are split on the likelihood that resin makers will boost their compounding efforts. Some have seen proof of it happening, while others say resin makers' interest in compounding waxes and wanes with the global economy.
John Comanita, global director of specialty plastics for polypropylene compounder Ferro Corp. of Cleveland, said his firm is considering dropping one of its PP suppliers because of the supplier's moves to increase compounding capacity.
Comanita declined to identify the supplier, but said that, overall, resin makers can justify their compounding efforts only by producing high volumes of commodity-type compounds.
``You might see some [interest from resin makers] in the low end, but there's nothing exotic about their formulations,'' he said. ``And they'll probably have a difficult time going in front of their [compounding] customers and saying, `We also make our own.' ''
The argument that resin makers can prop up sagging resin margins through compounding ``is valid on paper, but in practice, it has a limited impact,'' Comanita added. ``Where shareholders and investors are concerned, [resin companies] still have to make investments in people and equipment to expand in compounding.''
At market leader PolyOne Corp., Lance Mitchell sees a somewhat different picture, one where resin makers are asking for more help in meeting their compounding needs, as well as with marketing and research and development for compounds.
``It boils down to experience and skills,'' said Mitchell, who is the Cleveland firm's plastics compounds and color vice president. ``Resin producers want to focus on resin production and scale. They can't do [compounding] in a small-scale way like an independent compounder can. They don't have the infrastructure to do that.
``The independent nature of compounders like us is important,'' Mitchell added. ``Customers want to deal with several suppliers, and we offer services that can't be replicated by a resin producer.''
Frank Fire, executive vice president of sales and marketing for color concentrate maker Americhem Inc. of Cuyahoga Falls, Ohio, said resin makers' interest in compounding ``happens every business downturn,'' but added that he hasn't seen recent proof of it.
``Typically, a resin maker will try to bring color in-house and do things like offering precolored resin at the same cost as natural,'' Fire said. ``But when the market turns around, it messes up their system because of the cleanup they have to do.''
As for resin makers' chances of improving margins via compounding, Fire admitted that ``a tenth of a cent makes a big difference,'' but added that by the time a resin maker would get an expanded compounding business up and running, it would be too late to capitalize on the trend.
Resin makers may be tweaking their balance of in-house and toll compounding, but they do not seem to be expanding into color compounding or color concentrates making, according to Robert Fielding, vice president and general manager of concentrate maker Ampacet Corp. of Tarrytown, N.Y.
``In color, it's a question of knowledge of pigments and additives and how you put them together and disperse them,'' Fielding said. ``A resin company can do that if they want, but traditionally it hasn't been a place where they want to put their capital.''
Tapuriah pointed to GE Plastics' recent acquistion of engineering resins maker LNP Engineering Plastics and ExxonMobil Chemical Co.'s move to become sole owner of thermoplastic elastomers maker Advanced Elastomer Systems LP as proof of resin makers trying to boost their compounding presence.
But in the same vein, Tapuriah said he was ``surprised'' at Basell NV's recent sale of a 100 million- pound-capacity compounding site in Gahanna, Ohio, even though Basell said it was beefing up compounding in Jackson, Tenn. Basell sold the Gahanna plant to toll compounder Alloy Polymers, citing a lack of expansion space.
In a recent interview, Basell North America President Chuck Platz listed compounds as one of the firm's core North American businesses. But other resin makers have made contrary moves, with Equistar Chemicals LP and Phillips Petroleum Corp. each going so far as to sell off their compounding businesses since 1999.
Compounding ``is not something [Formosa] considers to be part of our core business,'' according to John Pastuch, a spokesman for PVC, polyethylene and PP maker Formosa Plastics Corp. USA of Livingston, N.J. Formosa has no expansion plans in compounding, Pastuch added.
In addition to resin makers' expected expansion, Tapuriah anticipates consolidation to continue in the U.S. compounding market as companies look to gain economies of scale and to serve global customers.
Among individual compounding segments - as split by Frost & Sullivan - TPEs rank as the fastest growing, led by thermoplastic olefins, thermoplastic vulcanizates and copolyesters. Reinforced and filled resins will grow thanks to the filled segment, while blends and alloys are still in their growth phase and enjoy higher profit margins, according to Tapuriah.
In color compounds and concentrates, Tapuriah said the balance of power is tipping toward concentrates. He described PVC compounding as ``a very mature market'' that's approaching saturation and is experiencing competition from other materials because of environmental con- cerns.
Tapuriah also pointed out three technology trends that will affect the U.S. compounding market through 2007:
* Increased use of TPOs and TPVs in auto parts such as instrument panels and air bags.
* Emergence of nanocomposite technology in mineral-reinforced compounds for the auto and appliance markets.
* Ability of metallocene technology to improve compound performance at lower costs.