Fueled by high costs for natural gas and other raw materials, resin prices took off like a shot in 2002, and only receded slightly before doing the same thing in 2003. Prices for most commodities are up at least 20 percent this year, while even more specialized products like polycarbonate and nylon are up 10 percent.
To put it mildly, compounders are not amused.
``There's been unprecedented speeds and amounts in price increases,'' PolyOne's Mitchell said. ``The price increases are the effect of a traditional margin squeeze, but it's been impossible to pass it all along to our customers.''
As a result, PolyOne is in the process of consolidating its number of resin sources.
``We're getting co-specified on a number of materials and we'll re-evaluate that from year to year,'' Mitchell explained. ``We're looking to get down to the point where we have three or four suppliers of polyethylene and polypropylene.''
``It takes a lot of time to pass on the increases,'' added Cusolito at Washington Penn. ``So instead of working on new projects, you spend time on raising prices. Some customers are very fair about paying increases, but some try to hold out on you as long as they can.''
High prices for additives such as titanium dioxide and carbon black also have pinched compounders in 2003. Both PolyOne and Ferro are looking into sourcing lower-cost additives from outside North America.
Schulman's Haines, a 35-year industry veteran, described 2003 as ``an environment of low growth and competitive pricing that we've never experienced before.''
But Ridenour countered that the pricing picture is part of an expected - if painful - maturation process.
``We've seen a similar thing in the auto industry for a number of years,'' he said. ``[North American compounders] are crying about resins costs, material costs and how their customers are beating them up, but their products either aren't specialized enough or they don't have the economy of scale they need to remain competitive.''
Caught in a speed trap
North American auto production is expected to clock in at 15.9 million units this year, according to CSM Worldwide, a consulting firm in Northville, Mich. That represents a drop of more than 2 percent vs. 2003, and it creates another hurdle to profitability for North American compounders, many of which are involved heavily in the automotive market.
``We're concerned about automotive,'' Ferro's Comanita said. ``The market is saturated and there's just not as much consumer demand for new vehicles.''
Nonetheless, Ferro continues to work on getting its thermoplastic olefin compounds into instrument panel skins and other auto-focused PVC replacement oppor- tunities.
Cusolito estimates that Washington Penn's sales into the auto segment are down 5-7 percent this year.
For Lati USA, the market ``has been steady, but a little weaker than we thought it would be,'' said operations manager Ciro Longo.
``Some [automotive] customers have slowed down product introductions,'' Longo said. ``And we've had some struggles with existing accounts.''
The auto market ``has been on a pretty good run for the last three or four years,'' said LNP's Crew, who added that his firm still is seeing interest in safety-related and under-the-hood uses.
At Schulman, engineers are at work on a number of interior and exterior projects, such as film for fascias and several opportunities for PVC replacement, Haines said.
M&A gone AWOL
Given the sluggish market, it's not surprising that merger and acquisition activity is off among North American compounders.
There have not been any major deals since GE snagged LNP and ExxonMobil Chemical Co. bought the half of Advanced Elastomer Systems LP that it did not already own. Both of those deals went down in the first half of 2002.
``People are more concerned about cash flow and as a result they're seeing fewer opportunities in M&A,'' Ferro's Comanita said.
``A lot of compounders are getting back to their knitting,'' added Crew at LNP. ``They're trying to grow organically rather than through acquisition.''
Ridenour, who has worked extensively in the M&A area, estimated that valuations of compounders with sales of $75 million or less have dropped in recent years.
PVC compounding businesses in that range have seen their value shrink from six times pretax earning to four times, while similar-size, polyolefin-based compounders now command only six times pretax earnings instead of eight times.
``Some buyers are still interested, but they're bargain hunting or looking for fill-ins or tuck-ins to their existing businesses,'' Ridenour said.
Embers into flames?
For North American compounders, optimism is there in small amounts. It's tightly guarded, but it's there.
At Lati USA, sales are up 5 percent this year, thanks mostly to growth in nylon. The firm also has seen increased interest in compounds based on polybutylene terphthalate, according to Longo.
``We're hoping things will be better in the fourth quarter,'' he said. ``But no one is protected.''
Comanita cited renewed interest in Ferro's Nimex-brand metallic colorants in vacuum cleaners for Hoover Corp. and other products. Nondurable markets like packaging and semi-flexible products also have been improving, he said.
Accel's Morgan sees some hope in the simple fact that customer inventory reduction is ``a finite practice.''
``At some point, customers will have to start buying again,'' he said.
Comanita, for one, continues to believe in the inherent strength and value of the core product.
``If you provide something unique,'' he said, ``your customers can help you get through difficult times.''