AKRON, OHIO (July 15. 12 p.m. EDT) — North American compounders are eating a solid diet of cheeseburgers in 2002, instead of the steaks they had ordered from the comeback menu. Cheeseburgers aren't bad, mind you, but they're still not steak.
A group of compounding executives contacted recently said business is up in the first half of 2002 — in pounds, if not in dollars — but the comeback from the economic slowdown that began in 2000 hasn't been as quick as they had hoped.
“North America is getting stronger, but it's not where it needs to be,” said Charles Crew, newly appointed president and chief executive officer of LNP Engineering Plastics Inc., an Exton, Pa.-based engineering resins compounder recently acquired by GE Plastics.
“The third quarter is looking good, with growth in nontraditional markets like industrial, consumer and automotive,” Crew said.
“We're still in an unsettled area in the economy,” added Lloyd Heller, president of American Thermoplastics Co. of White Plains, N.Y. “We're seeing a surge in demand, but that might be pre-buying — although there's some real demand because interest rates are low and the construction market is good. One of the issues is uncertainty on the part of our customers.”
That uncertainty has led processors to keep lower inventories of compounds on hand.
“One of the biggest changes is the short window on true demand for our customers — it's less than 30 days,” said George Abd, executive vice president at Spartech Corp. in Clayton, Mo. “Sometimes they don't know 14 days in advance. As a result, they're buying smaller amounts more frequently.”
Customers “are running at lower inventory levels, but when you're selling to Wal-Mart, you have to have a consistent amount of inventory,” Abd said. “You can't be caught short.”
ACTION IN A RECESSION
Market leader PolyOne Corp. of Cleveland has drawn attention for its decision to close 18 plants and eliminate 600 jobs — while expanding other plants and increasing its total capacity — by the end of the year.
Lance Mitchell, PolyOne's vice president of plastic compounds and color, said his firm late last month finished improvements that tripled capacity at its plant in Glendale, Ariz. Later this month, PolyOne will wrap up a project doubling capacity in Dyersburg, Tenn.
Industry analyst Vivek Tapuriah credited the company with making difficult moves and achieving savings in the wake of the 2000 merger of Geon Co. and M.A. Hanna Co. that created PolyOne.
“In a lot of mergers, the participants make big statements about savings, but PolyOne is actually doing it,” said Tapuriah, who is with Frost & Sullivan of Mountainview, Calif.
Ferro Corp. of Cleveland is closing a small, color-compounding site in South Plainfield, N.J., this month. Production from the site, which employed less than 20, will be shifted to Ferro's plant in Stryker, Ohio, which offers many of the same services, according to John Comanita, managing director of Ferro's plastics group.
Comanita added that the firm's 2-year-old plant in Jakarta, Indonesia, has exceeded expectations, leading Ferro to plan a site in China within the next three years.
LNP also closed its 70-employee site in Santa Ana, Calif., in April after losing a good chunk of West Coast business to competitors in the Asia-Pacific region. Some production from Santa Ana has been transferred to LNP's plant in Columbus, Ind., Crew said.
Other firms have been busy keeping their plants and equipment updated and ready to increase production. Spartech is adding 30 million pounds of compounding capacity — and 45 million pounds of sheet capacity — in Mexico by the end of the year to serve appliance and automotive markets there.
The firm also has replaced a single-screw extruder with a mixing line in Donora, Pa.; replaced two single-screws with twin-screws in Cape Girardeau, Mo.; and moved a twin-screw from a dormant plant in Goddard, Kan., to Conneaut, Ohio. The moves will add 4 million pounds of capacity in Cape Girardieu and 6 million pounds of capacity in Conneaut.
Since acquiring ATC two years ago, H. Heller & Co. Inc., a resin distributor also headed by Lloyd Heller, has increased capacity at the firm's four plants by as much as 10 percent by replacing older machinery with new twin-screw lines. All four sites also now do PVC compounding.
The business traditionally had been focused on toll compounding, but now has 60 percent of its output in proprietary products, Heller said.
Polymer Resources Ltd., an engineering resins compounder in Stamford, Conn., also has replaced several older lines at it Farmington, Conn., site in the past year, according to President Greg Bruno.
Clariant Masterbatches is moving its color compounding operations from a smaller plant in Mississauga, Ontario, to a 72,000 square-foot, seven-line operation in nearby Etobicoke. The new plant is to begin production in August, according to Jean Sirois, North American marketing director with Charlotte, N.C.-based Clariant.
PRICES: CHASING PENNIES
A series of price increases on commodity resins has made life tougher for the compounding crowd in the first half of 2002. While passing on increases to processors always has been difficult, several executives said doing so has been more difficult this year than in the past.
“It's difficult to pass on increases, but that's a function of the end-user market,” PolyOne's Mitchell said. “Our customers are having difficulty passing [increases] on to their customers. It's the Home Depot effect.”
Terry Haines, president and CEO of compounder A. Schulman Inc. in Fairlawn, Ohio, said he's concerned that higher prices could hurt demand as the year moves on.
“That's the big question moving forward,” Haines said of the pricing scenario.
ATC's Heller said, “Everyone's cost-conscious in production and raw materials, and they're even more so in unsettled times. Customers get a lot more bearish on price increases.”
The collision of higher prices and tighter inventory control has led to some unusual situations at Ferro.
“Customers are opting to pay premiums on smaller orders rather than carry inventory,” Ferro's Comanita said. “They've learned to live at lower levels of inventory and have seen the advantages of it.”
MAKE ME AN OFFER
A number of deals have lit up the compounding skyline in the past year, with perhaps the most noteworthy — and definitely the most discussed — being GE Plastics' acquisition of LNP for more than $300 million.
Industry watchers are speculating whether LNP's specialty focus can survive inside GE's conglomerate mind-set. Crew, the man in charge of making the combination work, said he looks forward to the challenge.
“There will be some cost savings, but the really exciting thing is getting GE's knowledge on the polymer side over to LNP,” he said. “We can do a lot with the combination of GE polymers and LNP's filler technology. We'll get new insights into additives and loading levels. We might be able to get conductivity with lower amounts of additives.
“Ingredients of the LNP business will run in all GE custom engineered products,” Crew added. “Crossover is happening as we speak.”
Analyst Tapuriah, for one, is sold on the merits of the deal.
“GE won't rest on LNP's laurels,” he said. “They'll use the technology to create new products in several markets.”
According to Crew, LNP will run as a separate business within GE Plastics. Small and midsize orders will go through the GE Polymerland distribution arm, but customers will have the option to buy directly from LNP.
Transfers from GE Plastics will boost the number of research and development employees in Exton by 25-30 percent. Crew also identified Asia and Eastern Europe as areas for LNP expansion.
“We look at this business as a jewel,” Crew said. “LNP's been around for awhile and, to us, they're the model of driving new technology into resins the other guys can't get to. And GE knows a lot of markets like automotive, consumer and furniture that LNP hasn't been in as much.”
Other eye-catching deals include:
* ExxonMobil Corp.'s buying out the other half of Advanced Elastomer Systems LP, a thermoplastic elastomer maker in Akron, Ohio, from partner Solutia Inc. Many believe the deal was prompted by Solutia's recent financial woes.
* Dow Corning Corp.'s purchase of Multibase SA, a French firm with compounding plants in Ohio and India. That deal led to some head-scratching, since it was made by Dow Corning, a beleaguered silicones maker, rather than Dow Chemical Co., one of Dow Corning's corporate parents.
* Spartech's acquisition of UVTec Inc. of Dallas and PolyTech South of Atlanta, which had been owned by British investor GWB Plastic Holdings.
* Americhem Inc.'s buy of Extruded Colors Inc., a color compounder serving the fibers market in Dalton, Ga.
The last two deals sparked talk that smaller, specialty compounders — those with less than $50 million in annual sales — might be increasingly in play as their owners cut losses in a tough market.
“The midsize guys are getting squeezed,” said Clariant's Sirois. “They're not flexible like the little guys and they're not big enough to compete with the big guys.”
“Midsize companies are disappearing — it's become almost a routine happening in the last 10 years,” said John Jones, president of Applied Market Information LLC, a consulting group in Wyomissing, Pa. “It's just a matter of bigger companies finding the right [smaller] ones to buy.”
The Spartech deals are proof of that pattern, Jones said, because they're “an extension of what Spartech's been doing and it gives them a bigger presence in the Southeast.”
Spartech's Abd said the two new buys give his firm more of a specialty presence, but he added they might be exceptions to the rule in the months ahead.
“We're coming out of a bad period, so smaller companies won't have pretty numbers to show to potential buyers,” he said.
Tapuriah admitted he was surprised by some recent deals, such as Dow Corning's Multibase purchase, because they're “totally against the cycle.”
“Sellers don't get good deals in a market like this,” he said, citing “major overcapacity” as a reason for recent market activity.
With $30 million in annual sales, Polymer Resources might be a firm with a target on its back, but Bruno, who joined the company in 1985, said he has not seen any increase in the offers he's getting.
“We've received a number of offers from offshore buyers in the past,” he said. “But 2000 was the peak. The frequency has gone down since then.”
Schulman's Haines and ATC's Heller each said their firms might be interested in compounders that work in engineering resins or custom color. But Comanita at Ferro said finding such deals might be easier said than done.
“We looked at a dozen acquisitions from 1997-99 and only made one,” he said. “The rest of them didn't pass the test. Once you get inside some of these firms, you find they're not what you thought they were.”
Still, Haines said he sees the GE-LNP and Dow Corning-Multibase transactions as signals that more activity lies ahead in the compounding arena.
Mitchell added that the GE-LNP and Exxon-AES deals “show recognition of the differences in compounding — that requirements are unique.”
ROOKIES IN THE BIGS
More deals and lower sales could mean a slower rate of entrepreneurial start-up firms. In short, it won't be as easy for two or three compounding guys to buy two or three old extruders and rustle up a few orders.
“There's a lot more risk to starting up a small compounder,” Heller said. “It's becoming a volume-driven type of business. [A new company] can get 500-1,000 pounds of somebody's business, but that's not our focus.”
LNP's Crew and Ferro's Comanita each said financial restraints could be limiting to potential new firms.
“You have to invest in new technology because customer requests are getting tougher, and that's hard for new guys to do,” Crew said.
“Small companies don't have the money to make investments in people and equipment,” added Comanita. “The number of suppliers is shrinking as technology advances and they can't keep up. Little guys might nibble and get 5 or 10 percent of an account because they're down the street, but customers want to go beyond that.”
But Sirois isn't convinced the little guys are done for.
“Barriers to entry are low and there's always a need for local service,” he said. “And any time [a larger company] closes a site, that creates an opportunity. We went through that last year [when Clariant closed a plant in Georgia] and now PolyOne is looking at the same thing. It raises questions in customers about service.”
PACKING ON POUNDS
The lure of big end markets — and compounders' attempts to meet their demands — helps get executives out of bed in the morning.
“Automotive's been steady,” said Schulman's Haines, whose firm does half of its business in that hypercompetitive area. “We expect to see better-than-anticipated orders through the summer months.”
Haines pointed out that Schulman has more than 100 pounds of its products on each new Chevy Avalanche sport utility vehicle being made in Mexico. Schulman compounds based on polypropylene, polyurethane and ionomers are in body side coatings, fascias, claddings and interior trims. Schulman makes its Avalanche products in San Luis Obispo, Calif., while the vehicles are made in Mexico City.
For LNP's Crew, the “big part” is that electrical/electronics market needs to improve.
“It won't get back to rah-rah 1998 where everybody's coming forward to spend money on new systems, but companies will still need to buy chip carriers and com-ponents,” Crew said of the segment. “And there's still a pressing need for weight reduction through thin-wall designs and placing more memory on drives.”
Crew also identified opportunities in telecommunications infrastructure, such as structural shielding for bay stations and transmitters.
Things have worked out well in electrical/electronics for Polymer Resources, but only because the firm's major electrical applications, like wiring devices and switches, are geared toward the construction market.
“That market never went down, but it didn't go up as much as other markets either,” PRL's Bruno said.
New markets for Clariant include wood composites in building and construction, where in-home color requirements are creating “an array of opportunities,” Sirois said. He also has noticed more development work in differentiating electronics and business machines, but that does not always result in an immediate payoff from the compounding side.
“People don't need to change computers that often,” he said. “Differentiation creates work for us, but not volume.”
“Look at Palm Pilots,” Sirois added. “Now, the device delivering software is a commodity. What catches your eye in the Sunday paper when you see the ad from Best Buy is what you buy. It's color, appearance and shape more than anything else.”
ROLLING OUT NEW STUFF
Product development has been scaled back a little during the slowdown, but compounders are rolling out some new offerings to tempt processors.
LNP is big on advancing its long-fiber technology into such GE materials as a Noryl-brand polyphenylene oxide/polypropylene hybrid and Valox polybutylene terephthalate. The firm could have its hands full, however, as key long-fiber patents expire at the end of the year, opening the door for competitors. Schulman already has announced it plans to enter the market.
LNP is so sold on long-fiber possibilities that it is increasing capacity for the products by 10 percent at plants in Indiana, Mexico and England and plans to add them to its mix in Malaysia by the end of the year.
Long-fiber materials “offer better structural performance in auto front-end systems and allow carmakers to get away from multiple materials,” LNP's Crew said.
PolyOne is looking forward to investing in a range of thermoplastic elastomers, including vulcanizates, polyurethanes and styrenic block co-pol-ymers when its plant closure and expansion program is done, Mitchell said.
Ferro's marketing focus will be on new grades of PP, PC and nylon compounds using its Nimex-brand metallic-look color technology for prod- -ucts such as appliances, personal watercraft and auto interiors. New flame-retardant PP compounds and specialty thermoplastic polyolefins could be rolled out by the end of the year or early 2003, Comanita said.
FERRO: PARADIGM SHIFT
Ferro, a major maker of filled PP compounds, has written a countercyclical success story this year, according to Comanita.
“The picture at Ferro is different,” he said. “We had a double-digit drop in sales last year, but we started to reposition early, so right now we're ahead of where we were last year in dollars, volume and profit. Sales are up 5 percent and profits are up a multiple of that.”
Publicly held Ferro no longer splits plastics sales out separately, but first-quarter sales in its performance chemicals unit — which now includes plastics — were down 9 percent, even with growth in plastics.
Ferro achieved that growth with a sales staff that was cut by 10 percent. Some of the reduction resulted from veteran sales staffers leaving the company after a new incentive program was put in place. The pared-down staff then aggressively pursued metal, paper and wood replacement rather than slugging it out with other plastics, Comanita said.
“The old excuse is to wait until the market comes back and sales will improve. We had to teach that new business is available at any time in the business cycle.
“We saw modest improvements in automotive, appliance and packaging, but the main reason for our net gain is shifting focus to new business development. We sold more high-value material last year in spite of the recession.”
Ultimately, the slower comeback has led many compounding execs and watchers to expect growth of only 1-2 percent in the North American market this year, instead of the 3-5 percent they were hoping for earlier in the year.
“You used to be able to take [gross domestic product] growth and double that and arrive at compounding growth. Now, that's not the case,” said Schulman's Haines. “We should be able to match the resin producers at 3-4 percent growth, but I'm not sure we can do it this year.”
In 2002, “3-5 percent growth is feasible in pounds, but in dollars it will only happen if [compounders] are successful in passing on price increases,” AMI's Jones added.
Frost & Sullivan's Tapuriah warns that the high growth rates of the exuberant 1990s might not be seen in North American compounding for awhile.
“We won't see 7-8 percent annual growth in next five years because end markets won't be bouncing back that much,” Ta-pur-iah said.
At Spar-tech, Abd is remaining “cautiously optimistic.”
“When we came out of the last downturn in 1993, people weren't doing back flips and buying tons of material,” Abd said.
“But that was so long ago, a lot of people in the industry don't remember what that was like.”