AKRON, OHIO (June 21, 12:30 p.m. EDT) — The tattered remains of resin makers that have exited the North American market in the past 15 years still can be seen at the edges of the plastics industry, rustling against the fence on windy nights like losing scratch-off lottery tickets.
Where did they go? What happened to the likes of polyethylene makers Cain Chemical and Chemplex? Why did PVC makers Rovin and Air Products bid a fond adieu? Who whacked Wacker, a onetime PVC maker?
By conservative estimates, there were 18 major PE makers and 15 major PVC makers operating in North America when the first issue of Plastics News came out in 1989. By 2004, consolidations and sell-offs had reduced the PE number to 11 and the PVC total all the way down to five.
The polystyrene market has experienced a lesser degree of consolidation, while the number of PET makers has remained relatively static and the number of polypropylene suppliers actually may have increased, as markets for that product have grown.
Recent interviews with industry veterans at the producer, processor and consultant levels unveiled a couple of resonant thoughts: First, it pays to be integrated; second, smaller might be better.
But as in most things resin-related, the whole answer isn't quite that simple, as we're about to find out.
A matter of survival
One thought that surfaces repeatedly is that maybe some of the old-time resin makers never should have been in the market in the first place.
“The reason a lot of suppliers have gone away is the inherent lack of profitability and low returns,” said Barry Hendrix, a vice president with PVC maker Oxy Vinyls LP of Dallas. “This is a market that has remained competitive. Pricing still depends on supply and demand.”
Oxy Vinyls itself is an example of consolidation in the PVC market. It was created from the 1999 merger of the PVC units of Geon Co. of Avon Lake, Ohio, and Occidental Chemical Corp. of Dallas.
“In order to survive, a producer needs to have strong, integrated economics,” Hendrix added. “The market has been whittled down to those producers with a low-cost position. It's really been a survival of the fittest.”
Strategy within a larger company also plays a vital role, particularly in a petroleum-based field.
“It boils down to what business does a company want to be in,” said Pat Duke, an analyst with the DeWitt & Co. consulting firm in Houston. “ExxonMobil is in energy, but they still view [plastic] derivatives as a way of getting value out of a barrel of oil. But oil companies like Shell have gotten out and BP is in the process of doing so.”
Another perhaps contradictory effect of supplier shakeout is that more capacity actually has been kept in the market, according to Jeff Taylor, PE vice president with Westlake Group in Houston.
“Capacity owned by weaker companies now is run by healthier companies,” Taylor said. “There's less confusion, less noise than when there were so many smaller operators.”
“You'd think fewer suppliers would mean more price stability, but there are still 12 or 13 PE suppliers,” Taylor added. “It's not like there's only five. There's still a lot of competition.”
But the PE market offers a solid example of just how quickly those changes can hit. In a 36-month period beginning in mid-1997 and ending in late 2000, eight PE makers became four. The deals were Exxon Corp.'s acquisition of Mobil Corp., Dow Chemical Co.'s purchase of Union Carbide Corp., the formation of the Chevron Phillips Chemical Co. LP joint venture and the creation of the Equistar Chemicals LP joint venture between Lyondell Petrochemical Co. and Millennium Chemicals Inc.
Howard Rappaport, an analyst with Chemical Market Associates Inc. consulting firm in Houston, said that market consolidation ultimately has helped resin buyers.
“For resin buyers, consolidation of suppliers means that the industry has remained viable and competitive,” Rappaport said. “Consolidation means larger critical mass at fewer companies, but it also spreads fixed costs over more volume.”
“Whether it's 15 or 10 suppliers, sometimes it only takes one to make a competitive situation.”
On average, PVC buyers interviewed for this story did not seem all that bothered by the elimination of two-thirds of their choices in 15 years, while PE buyers seemed somewhat nostalgic for 1989.
“The weak producers were shaken out, but they weren't financially healthy and didn't have good business models, one veteran PVC buyer based in the Midwest said. “Some of the savings [in pricing] was from companies that were in their death throes. Now, there are still increases and declines, but there's more stability.”
Another longtime PVC buyer based in Texas agreed that stability has been the main benefit of the thinning PVC ranks.
“There's less of pricing going up and down like a yo-yo, because the ones that are left have captured and control more of the market,” the buyer said. “Before, some [PVC makers] were intentionally overproducing to drive prices down. You'd have some running full out and others slowing up. Now they're a little more disciplined in matching up supply with demand.”
Not all PE buyers are convinced. Especially in high density PE, where some widely used blow molding resin grades now are made by only two or three suppliers.
“There's a lot less room to negotiate [with PE makers], but it's still just as difficult for us to pass costs on to our customers,” a Texas-based PE buyer said.
A longtime PE buyer in Ohio argued that the PE market could have supported a larger number of producers if the original entrants had taken a more sound financial approach.
“What happened was, a lot of people made a bad decision of looking at [resin] pellets as a commodity,” he said. “That was a knee-jerk reaction to prices going up and down.
“To them it was cash flow; they'd rather move all their pounds at a lower margin and pay all their bills than stick to their guns on a price increase.”
In that sense, it wasn't just how many companies left the market, but which ones did.
“If you're a [PE] buyer, [consolidation] has been clearly negative,” added Robert Bauman, an analyst with Chem Systems Inc. consulting form in Houston. “The producers that disappeared were the biggest price cutters. Mobil was very heavy on price cutting. These companies gave lots of rebates and would undermine price increases.”
Westlake's Taylor, who's been in the PE market for more than 25 years, said he believes that most customers “are less worried about getting the price down than they are about price stability.”
“Most customers don't care if polyethylene is 50 cents a pound or 80, as long as the guy down the street's paying 80 also and that they're paying the same price next month,” he explained.
Taylor — who spent much of his career with the PE unit of Phillips Petroleum Corp., which was merged into the Chevron Phillips joint venture in 1999 — added that PE's continued affordability overshadows any potential loss in the number of grades available.
“Potentially, there might be fewer product offerings, say, if Exxon and Mobil made the same hexene [linear low density PE],” he said. “But the other reason [consolidation] happened is to get the cost down. The fact is, PE is still a pretty good bargain. It was in the 45-50 cent range in the 1950s and that's still basically where it is today.”
Another potential issue brought about by consolidation is the possibility of a particular resin grade suddenly being unavailable from a shrinking base of suppliers.
“If you're specified in with two suppliers, different companies might have different goals and different projects they might not go after, but you'd have a choice,” said Garland Strong, president of Resin Technologies Inc., a resin-buying adviser based in Fort Worth, Texas. “If you were only with one supplier, you might not have that. If that supplier decides he wants to get out of the film market, what do you do?
“We're encouraging processors to focus on the international market for the long-term,” Strong added. “They need to sample resins and get approved globally.”
And in some cases, a preference for more or fewer suppliers comes down to an old-fashioned battle of nerves.
“Some buyers will tell you that they liked the volatility [of dealing with many suppliers] because they could benefit as prices went up and down,” CMAI's Rappaport said. “But if you're in a fixed-price environment, volatility is a bad thing.”
Living in a multimaterial world
The effects of consolidation also might differ from market to market, even between PE and PVC.
“PVC might not have seen as much a difference because it's sold more into the construction market, where you can have contracts based on cost-plus pricing, so you can include price increases,” consultant Bauman said. “In polyethylene, you've got more products sold into retail where they don't want any price increases.”
PVC also is a market where downstream pipe and distribution markets owned or influenced by large suppliers such as Shintech Inc. or Formosa Plastics Corp. USA might have more impact than supplier consolidation, according to consultant Duke.
“The whole chain is driven by how much PVC those companies feel the pipe market can accept,” he said.
Those in the PVC market also generally said that the quality of the material has been improved by combined technologies generated by consolidation, while PE players overall said there has not been much change in their material as the market has shrunk.
More to come?
Equally important is the possibility that as markets for PE and other resins become more commoditylike, we might see more consolidation in years to come. If so, such consolidations would be entered into for many of the same reasons they have occurred since 1989.
“In some respects, [consolidation] has strengthened the whole plastics industry by helping suppliers get profitable, but if processors can't buy resin at competitive prices on a global basis, it's going to hurt as well,” RTI's Strong said. “Economic common sense tells you that the more choices you have, strategically, will get you the best deal.”
Consolidation hasn't bothered PE production at this point, added consultant Duke.
“It's still the market that sets the price. Suppliers have developed more structure and become better and more effective at the cost of producing and being competitive on a global scale.
“If you've got more than one producer. You're OK.”
Duke added that he believes resin makers are well aware of the fact that using their larger market shares to ride their customers too hard could hurt them in the long run.
“When you get down to it, the converter is the vehicle to market for the resin maker,” he said. “If not, they'd have to do it themselves. Everybody is somebody's favorite supplier, but there's got to be give and take.”