The slowdown in the global economy is having a definite effect on North American resin distributors, but good luck getting them to agree on just what that effect is.
One thing's for sure: Distributors and resellers sold 420 million more pounds of polyethylene and polystyrene in the first 10 months of 2002 than they did in the same period in 2001. Those numbers, which reflect a jump of more than 11 percent, were generated by the American Plastics Council in Arlington, Va.
``Resin producers are doing more through distribution,'' said Michael Rademacher, vice president of distribution for PolyOne Corp. of Cleveland, one of North America's largest resin distributors. ``It's a way for processors to manage working capital better by buying four truckloads and spreading it out instead of only occasionally buying a rail car.''
As a result of that trend, resin suppliers are asking that distributors accept smaller margins, to carry more inventories, to buy in larger quantities and to provide more services, according to David Bening, vice president of sourcing for Ashland Distribution.
Ashland Distribution is the parent of General Polymers of Dublin, Ohio, one of North America's largest distributors.
Many industry watchers consider GP to be the second-largest North American distributor, in dollar terms, ahead of PolyOne but trailing GE Polymerland of Huntersville, N.C. GP's sales total is estimated to be between $1 billion and $1.5 billion. GE Polymerland sales are more than $2 billion, including sales of GE Plastics' own resins.
``Distribution in general is growing faster than the rest of the industry,'' added Ed Holland, owner of commodity resin distributor M. Holland Co. of Northbrook, Ill. ``Plastics are growing faster than [gross domestic product] and distributors are growing faster than that. Suppliers are building larger plants and cutting smaller customers.
`Some say any [annual accounts] under 5 million pounds go to distribution,'' Holland said.
Results at Holland would seem proof of that trend. M. Holland's volume in pounds was up 15 percent in fiscal 2002, which ended Sept. 30.
Results at other firms were mixed. Officials at Atlan Plastics Inc. in Dallas; Plastic Materials for Industry Inc. in Marietta, Ga.; and Network Polymers Inc. in Akron, Ohio, each said their sales were flat in 2002.
Sales at Chase Plastic Services Inc. in Clarkston, Mich., were up more than 13 percent, according to Kevin Chase, the firm's president.
Volume in pounds was up 15-20 percent in 2002 at commodity resin distributor Bamberger Polymers Inc. of Lake Success, N.Y., and up 30 percent at engineering resin distributor Channel Polymers of Norwalk, Conn.
Bill Chester, owner of Plastics Materials for Industry, an engineering resins distributor, said there's a direct link between the economic climate and distribution volume.
``Processors buy more through distribution in a down phase because of service,'' Chester said.
``Some customers are buying as many as 17 different materials and they want one-stop shopping and instant gratification.
``We can combine shipments for them and do that,'' Chester added. ``But of course, there will always be people who will make 14 phone calls to buy three items and who want to beat you over the head on price.''
The possibility of resin makers turning over accounts that might be having financial trouble to distributors was mentioned by some distributors, but questioned by others.
``The way resin makers look at it is that they don't want to package resin,'' said David Skoczen, Channel Polymers general manager. ``They want to ship rail cars and get paid in a timely manner every 30 days. They don't want the risk of trying to get payment from a small customer with shaky credit.''
``Resin makers have used distributors to mitigate credit exposure,'' added Tom Irvine, president of engineering resin distributor Prime Alliance Inc. of Des Moines, Iowa. ``They don't have the resources to track smaller companies.''
At Network, the average time for customers to pay went from 50 days to 60 days in the past year, said owner Alan Woll. But Kevin Chase suggested that average days to pay ``is just one factor [resin makers] look at when deciding which accounts go to distribution.''
Dennis Don, an executive vice president at Bamberger, pointed out that although distributors are ``as strict, if not stricter'' on credit as a resin producer, they might be more flexible and accept different methods of payment.
The credit situation can cut both ways, according to Gerry Podesta, vice president and general manager of GE Plastics Americas, which includes GE Polymerland.
``Some resin makers may look to distributors to carry credit risk in a down economy,'' he said. ``But other [resin makers] may pull back on distribution and say they want to be closer to their customers.''
PolyOne's Rademacher questioned the existence of a ``bad credit'' strategy on the part of resin makers. ``There's no point in producers turning over poor-paying customers to distributors,'' he said. ``They want a good relationship with us, and doing that wouldn't make any sense.''
Predictions of consolidation among North American resin distributors have not come true. For the most part, buyers have disappeared.
``If you're a national distributor with a full complement of commodity and engineering materials and you cover all geographies, there really aren't compelling reasons to make acquisitions,'' Rademacher said. ``Resin suppliers also decide who their distributors are going to be, and they haven't made a lot of changes.
``If someone wants to come in and buy a U.S. distributor, they have to have resin suppliers who are supportive of that move, so I don't think [consolidation] is really a trend.''
The disappearance of the go-go economy of the 1990s also is a factor, since it took high evaluations for plastics mergers and acquisitions along with it.
``There are just very few buyers out there, forget the price,'' said David Der Hagopian, president of engineering resin distributor Entec Polymers Inc. in Maitland, Fla. ``There are a lot more sellers, but they're not going to get mid- to late '90s [price] multiples any time soon.''
``It's been a very difficult year and a half for buying and selling companies,'' added Podesta at GE Polymerland.
Chase estimated that multiples offered for distribution firms are probably half what they were in the mid-1990s.
Ed Holland and industry consultant Margaret Baumann each questioned the benefit of acquiring a distributor in the current business environment.
``In merging or acquiring, you can get customer lists and inventory,'' Holland said. ``Maybe there's a product line you want and can't get it otherwise. But that's a lot of money to spend just for entry into a company.''
``You're not acquiring hard assets'' when you buy a distributor, added Baumann, president of G.H. Associates in Lebanon, N.J. ``It's a heavy goodwill business, and that's really the only thing you're acquiring.''
Longer-term, competition might drive out those distributors that rank in between the majors and small, tightly focused regional players.
``Regional distributors might not exist as they used to,'' said Prime Alliance's Irvine. ``Geographic reach and the Internet have changed things. You can't run a $100 million business on the backs of mom-and-pop businesses.
``You want to do some small business because it's good business, but you also need to have big accounts to take your business to the next level,'' he said.
``Some of the small and midsize guys will probably disappear as producers pare down the number of distributors and brokers they want to deal with,'' Holland added. ``They want to do the same or more business without making more phone calls. Some of these firms now do 20-30 percent of their business through distributors, exporters or resellers.''
Rademacher said, ``It's becoming more and more difficult for regional [distributors] because the world is becoming more global and even customers in the U.S. are becoming more national. A regional molder in Minnesota now has operations in Mexico and Puerto Rico and across the U.S.''
Customers' needs also have changed.
Processors ``are competing globally, so it's not just the piece cost here - in many cases, they've got to have the best piece cost anywhere,'' Bening said.
Others argue there's plenty of room at the distribution table for companies of varying sizes.
``Large producers don't have the sales forces and can't cover the ground they once did,'' said Network's Woll. ``That's an advantage for the midsize distributor.''
``It's very costly for [resin makers] to cover some of those [small to medium-size] accounts,'' Channel's Skoczen said. ``They need to put a sales guy on a plane, while a distributor can have a guy go by car and visit them every month. When they make that change, it's usually permanent.''
Several distributors mentioned that customers are requesting more frequent shipments in smaller amounts.
Atlan President Dan McIntyre said his firm has met such requests, but he added that the practice has driven up his firm's overhead - costs that it hasn't been able to pass on entirely to their own customers.
``It's happening because customers don't want to be stuck with inventory,'' McIntyre said of the change in buying patterns. ``They buy only when they need to order and don't want to have something extra left over.''
The slow-moving economy of the past 18 months hasn't paralyzed North American distributors. Many of them are taking steps to add personnel or coverage areas. Actions playing out recently or set to play out in 2003 include:
* Channel adding two more resin suppliers in the first quarter of 2003, bringing its total to 17.
* Holland in the midst of building a 4,000-square-foot expansion to its 166,000-square-foot Chicago warehouse.
* Bamberger hiring five sales reps in North America in 2002 and two more in 2003, for a total of 27. The firm has added regional managers and product managers for more decision making and better focus on a local level.
* GP adding sales districts in Erie, Pa; Kansas City, Kan.; and western Canada, and opening new distribution centers in Anderson, S.C.; and Fontana, Calif.
* PMI planning to add one or two sales reps in 2003.
* GE Polymerland dedicating a commercial team to smaller accounts, including a focus on driving volume through smaller injection molding accounts. The effort covers molders buying less than $500,000 in resin annually, Podesta said.
(PolyOne and Chase Plastics also have expanded their businesses. For details, see related stories on this page and Page 8.)
The Ravago move
There's been a lot of speculation in the industry about the intentions of Ravago NV, a major European distributor that last year bought Barberton, Ohio-based Hinds Co., a $50 million-a-year commodity resin distributor.
Ravago, based in Arendonk, Belgium, has operated a recycling center in Hempstead, Texas, since 1984. The firm added distribution and compounding there in the past three years. Ravago also has a marketing alliance with Entec.
In spite of numerous rumors to the contrary, Ravago spokesman Guy Weyst said the company has no current plans to expand in North America. Weyst declined to comment further on Ravago's strategy.
Entec's Der Hagopian also declined to comment on Ravago's strategy, saying only that Entec continues to have a ``business relationship'' with Ravago.
Some industry watchers question Ravago's ability to duplicate its European business success in North America. They back up their doubts by pointing to Albis Corp., a German distributor that has built a solid North American business in the last decade, but still operates a much larger European network.
A resin-making view
Officials at resin makers Bayer, DuPont Co. of Wilmington, Del., and Nova Chemicals Corp. of Pittsburg each said their firms have no plans to add to their distribution slate in 2003, but a Bayer executive said he expects sales growth through distribution to be at a higher rate than overall market growth this year.
``We look at distribution as a core competency because of the relationship building it offers and because of how it allows us to meet the changing needs of our customers,'' said Jim Murphy, manager of plastics distribution sales for Bayer, which is based in Pittsburgh.
``In the future we'll look for more nontraditional ways to use distributors.''
DuPont channel manager Kelly Reichert described distribution as ``a very critical part of [DuPont's] overall strategy.
``[Distribution] is a reach tool for us,'' she said. ``It allows us to touch more small customers than we can get to ourselves.''
Spokesman Jack Maurer said distribution is ``an important channel'' for Nova, but the company has no changes planned for its core group of distributors and brokers.''
Murphy and Reichert each said individual needs play more of a role than sales volume when their firms decide if a customer will be served directly or via distribution.
``We have some smaller accounts that we still service directly, and some larger ones who prefer to buy through distributors,'' Reichert said.
At Bayer, the direct vs. distribution debate is settled by determining which option will have the most value to both Bayer and the customer, Murphy said.
Consultant Baumann agreed that customer needs outweigh volume in the distribution decision.
She also pointed out that customers that make simple buys - buying the same type of material month after month - might want to swing back from distributors to resin makers in a down cycle to save a little on margin.
Although many distributors offer compounding themselves or through toll agreements, not everyone is sold on the idea.
At Entec, Der Hagopian said that offering compounding ``separates [Entec] from the competition,'' but he added that the capital-intensive and high-risk nature of compounding prevents all distributors from following suit.
Irvine at Prime Alliance added, ``It's a foregone conclusion that you have to have a strong compounding angle, either in-house or with a partner.''
Bamberger's Don isn't as convinced, citing overcapacity in the compounding market. Holland takes an even more extreme anti-compounding view.
``We shut down our compounding in 1967 and have no interest in it,'' Holland said. ``We get our compounding done on a toll basis. It's a philosophical umbrella that we operate under. At our level, there would be culture clashes with our suppliers if we got into compounding.''