For a group that saw double-digit gains in sales and volume last year, North American resin distributors sound very concerned.
The source of their agitation, as in many sectors of the plastics industry, is margin.
``Revenue was up in 2004, but margins were tanking,'' said Kevin Chase, president of Chase Plastic Services, an engineering resins distributor in Clarkston, Mich.
Distributors are caught in the middle between resin suppliers and processors, Chase said, and have been able to pass on only slightly more than half of 2004 resin price increases so far.
Alan Woll is in a similar situation at Network Polymers Inc., the engineering resins distributor he owns in Akron, Ohio.
``Margins haven't kept up for the most part,'' he said. ``Sometimes there's a lag time between when we pay the increase and when we can raise our own prices, and sometimes there isn't. It depends on the strength of the relationship with the supplier.
``In some cases we're in there fighting and we have to decide if we want to sell for less than the cost of the increase we've taken. Right now, about 50 percent of the  price increase is through.''
Jim Dwyer, president of commodity distributor Osterman & Co. in Cheshire, Conn., said, ``We're forced to pass through as much as we can, but it's been tough on our customers.''
Peter Krippendorf, owner of commodity distributor A-Top Polymers Inc. in Windham, N.H., agreed, saying processors' margins are so thin that if they don't get their prices up, they'll go out of business.
``That's just the reality of it,'' Krippendorf said.
The struggle also is taking a toll in other areas.
``Whether you're a distributor, processor or producer, you've been affected by the tremendous amount of energy they've had to spend on managing prices,'' said Michael Gilbert, vice president of Dublin, Ohio-based Ashland Distribution Co., which is North America's largest resin distributor. ``We have to balance time on the pricing side and work on things that lead to growth, like application development.''
Similar stories are heard throughout the market, which has left many distributors at a crossroads. It's great that resin producers continue to turn to them as a sales channel for larger accounts each year, distributors said, but with resin prices soaring, can distributors continue to make a decent profit while doing so?
The sector's growth is significant. In pounds alone, U.S./Canadian sales of high density polyethylene via distribution were up 15 percent last year, according to the American Plastics Council in Arlington, Va. Similar category sales of linear low density PE were up 30 percent, while nylon resin soared almost 50 percent. Distribution and reselling accounted for about 4 billion pounds in combined PE sales last year, according to APC.
And if volume in pounds is up that much, selling prices are up at least that much.
``Resin producers are focusing on key accounts, accounts that distributors can handle locally,'' said Michael Rademacher, vice president of distribution for Avon Lake, Ohio-based PolyOne Corp., which is third in the market. ``It's hard to find a commercial [resin] producer who's willing to put material into different-sized packages. Anybody that needs packaged products is going to a distributor.''
PolyOne's distribution business enjoyed another solid year in 2004, as sales grew 15 percent to $606 million and profit nearly doubled to $18 million. The unit generated about 25 percent of PolyOne's total sales last year.
A late-2004 merger with engineering resins distributor Prime Alliance has jump-started growth at Channel Polymers, a commodity resin distributor in Norwalk, Conn. Sales at Channel Prime Alliance - as the new firm is called - are expected to grow 25 percent annually for the next five years, according to President David Skoczen.
``The merger has had a dramatic effect on our business,'' Skoczen said. ``We've got more arms and legs on the street and a lot of growth. It's been a combination of the merger and picking up extra momentum.''
Channel Prime Alliance added resin giant Dow Chemical Co. to its supplier mix Jan. 1 and expects to top the $200 million sales mark in 2005.
Two reasons behind the firm's optimism are that the merged firms shared only two suppliers, and that there was less than 5 percent overlap between customer bases. As a result, Skoczen said, a lot of cross-selling opportunities exist.
Working with distributors remains a good fit for many resin producers looking to cut costs in their sales staffs or in other areas.
``Resin makers want to produce in large bulk quantities, and customers want to buy when they need it,'' Ashland's Gilbert said.
And there are worse problems to have than dealing with higher sales volumes and higher selling prices.
``I think in the short-term, the market will be more difficult,'' said David Der Hagopian, president of engineering resins distributor Entec Polymers LLC in Orlando, Fla. ``But if I didn't make money in '04, you're not going to make money.''
The distribution market runs on credit, more so than the resin market or the market for compounds and concentrates. That's wonderful if you're a midsize or small processor, but not quite as wonderful if you're the distributor extending larger amounts of credit as resin selling prices go through the roof.
This reality has placed some distributors in the almost unheard-of position of walking away from business.
``Producers don't want to carry inventory and customers don't, so that falls to us,'' said Ed Holland, president of commodity distributor M. Holland & Co. in Northbrook, Ill. ``We've walked away from business where they can't take increases or are a credit risk. It's not worth it.''
``Our biggest worry is getting paid,'' added Chase. ``We have to hope the end user is allowing processors to get price increases. There are increasing credit issues.''
At Channel Prime Alliance, Skoczen said the credit issue looms large in the overall distribution market.
``Granting more money in credit makes everything more extreme and more complex,'' he said. ``It really ties up your working capital.
``Credit extensions on an unsecured basis are higher,'' Skoczen said. ``If customers can't pass the increases on to the OEMs they work with, they have to eat it. Bad debt has been very low so far, but the signs are there.''
A-Top is one firm that takes a hard line on credit practices.
``We're very strict on terms,'' Krippendorf said. ``We don't use credit terms as a sales tool. I won't let my sales reps do it. We expect to get paid at the get-go. As a result, we haven't been affected by the rash of bankruptcies that have hit the processing market.''
Strength in numbers
If adding new sales reps is any kind of indicator of a solid distribution market, then things are going well indeed.
Performance Polymers, a commodity resin distributor in Leominster, Mass., added six sales representatives last year. Channel Prime Alliance already has added four in 2005 and will bring in at least two more by the end of the year.
Chase added a sales staffer earlier this year and will add at least one more by year's end. In that same period, Osterman expects to grow its sales force by three to five members. And Network made a strategic move by hiring an Asian sales rep to work with transplant companies in the United States.
Distributors also are adding to their supplier ranks. Chase began distributing acetal and polyphenylene ether for Asahi Kasei Corp. earlier this year; M. Holland added resins from Chevron Phillips Chemical Co. LLC on March 1; and Network initiated distribution of nylon resins and compounds from Nylon Corp. of America.
Entec plans to add one or two sales people by the end of the year, Der Hagopian said. The firm moved to a larger Chicago-area warehouse in mid-2004. Entec now operates a 100,000-square-foot facility in Plainfield, Ill., a step up from its former 60,000-square-foot site in Romeoville, Ill.
No more easy money
There already have been some new entries in the distribution field in 2005. In Houston, TDL Plastics merged with Lexon Polymers LLC and will continue to operate under the TDL name. Each company was less than 5 years old. Thermoplastic elastomer industry veteran Jonas Angus has created TPE Solutions Inc., a distribution firm that will focus on the TPE market. TPE Solutions is based in Shirley, Mass.
But a number of industry veterans said it's a lot more difficult to break into the distribution market today than in past years.
``Several years ago, you could start a distribution business on 100 grand if you knew some people at a resin supplier who would take care of you,'' said A-Top's Krippendorf, who's been in business for 30 years. ``There wasn't a high wall. Now there are barriers to entry. You need a lot of money and a lot of volume.''
Performance President Michael Carota agreed: ``Resin suppliers are looking for well-capitalized partners. You need a lot of cash.''
If fewer new entries are seen in distribution, smaller margins could be to blame.
``When a PE [rail] car was selling for 25 cents a pound, it was easy to make 10 percent [margin],'' explained Regis Magnus, co-owner of Resin Distribution Inc. of Ayer, Mass. ``With prices at 60 cents a car, there's no way to do it. The margin's not there.''
In fact, a number of distribution officials wouldn't be surprised if a consolidation wave grips the market.
``We could be looking at significant industry consolidation,'' Osterman's Dwyer said. ``The market has been very difficult for a lot of people.''
Consolidation `` is a natural life cycle to any industry,'' said Ashland's Gilbert. ``We've already seen deals like Entec buying West Coast, and in resin we've seen Dow-Carbide and BP-Amoco.''
Channel Prime Alliance's Skoczen pointed out, ``We've been seeing fewer producers and fewer processors. Eventually we'll see consolidation in [the distribution] field as well.''
Such consolidation has begun, even if its pace is slower than some expected. In addition to the Channel Prime Alliance and Entec-West Coast deals, North America Group Inc. of Boston has assembled four resin distribution firms - Goldmark Plastics International, Pro Resins Inc., Pyramid Polymers Inc. and GeoChem International Corp. - under a corporate umbrella since mid-2003.
Several distribution business owners report that calls from private equity firms looking for potential acquisitions have increased in the last couple of years. Activity in the larger plastics sector has increased as well, but executives said the lure of injection molding or extrusion firms may not hold true in distribution.
``There may be [merger and acquisition] opportunities for strategic buyers, but I don't know if the return on investment is there for a major [financial] player,'' said Kevin Chase. ``Distribution isn't real people-heavy. Investors can't get in there like at [specialty compounder] Kraton and cut people and upgrade.''
Houston-based Kraton was bought by equity firm Ripplewood Holdings LLC in 2001, then sold to Texas Pacific Group, another equity firm, for a $250 million profit late last year.
Such deals would be difficult to pull off in the distribution sector, where many firms don't even own their own warehouses, officials said.
At Network, Woll doesn't welcome the calls he's been getting.
``Most private equity companies chew you up and spit you out,'' Woll said. ``I'm not going to do that to my people.''
It's always easier to see the road left behind. It's tougher to anticipate the road ahead. Many executives interviewed for this story shied away from the topic of the market's future, but Ashland's Gilbert thought he'd take a shot at it.
``The distribution market is going to move into large, national, low-cost companies and small, specialty niche-type companies,'' he said. ``It's becoming a space where suppliers do best in manufacturing the product and we shine in delivery. We can do that for them.''