In the midst of demand growth in 2004 and early 2005, North American compounders were being squeezed like a pot-bellied pig in a pit of anacondas.
``We weren't able to raise prices early on because of the slowness in demand, and it's still difficult to pass increases on,'' said Bert Lederer, vice president of Teknor Apex Co., a compounder of PVC and engineering resins in Pawtucket, R.I. ``Many customers are still pushing for lower prices since they're trying to get margin back.''
What happened is that the growth of 2004 helped compounders move more material, but compounders continued their pattern of raising prices to their own customers at a slower rate than resin prices were rising. When resin prices flat-lined or softened in early 2005, it gave compounders a chance to get caught up from increases seen in the second half of 2005 - but customers saw those resin decreases and began to question why their compound suppliers were still trying to pass through price increases.
``The dilemma we have is that polymer prices are what our customers see,'' said Robert DeFalco, president of color concentrates maker Ampacet Corp. in Tarrytown, N.Y. ``Customers also are working off inventory so as not to get stuck with high-priced resins and compounds.''
Higher prices for additives such as titanium dioxide and flame retardants also have dampened compounders' ability to capitalize on the resin slowdown.
``Additives are still going up and we haven't caught up on resin prices,'' said Lance Mitchell, vice president of plastic compounds and color at leading compounder PolyOne Corp. in Avon Lake, Ohio. ``It's a continuing challenge to regain acceptable levels of margin.''
Unfortunately, compounders might have to get used to the compressed state of profit, unless they're at the forefront of industry innovation.
``Margin squeeze is a constant, ongoing process,'' said Andrew Reynolds, an industry consultant with Applied Market Information LLC in Wyomissing, Pa. ``How to make compounds isn't a secret anymore. Anyone with desire and a twin-screw extruder can make them. Unless you've got proprietary products or technology, it's going to be a challenge.''
Future shock
Market unpredictability - an issue even in the best of times - seems only to have increased in 2005.
``This has been the most difficult 12 months I've ever seen, based on difficulty forecasting raw material costs and customer orders,'' said John Comanita, a vice president with Ferro Corp., a major polypropylene compounder based in Cleveland.
Part of the uncertainty is tied in to customers holding on to inventories in the face of lower prices. Another part is an amplification of just-in-time inventory practices.
``Business picked up in January and February, but March through May were very cool,'' said Dwight Morgan, president of color concentrate maker Accel Color in North Ridgeville, Ohio. ``But that's just how it is this year. It wasn't like that last year.
``Asian demand fell off vs. the red-hot levels of last year, and that affected global markets,'' Morgan added. ``Molders don't want to buy in a downward trend, so they've delayed buying as long as they can.''
Pre-buying of compounds and resins was especially heated in the second half of 2004, according to Terry Haines, president and chief executive officer of compounder A. Schulman Inc., based in Fairlawn, Ohio.
``It's easy to order 10-15 percent more when prices are going up, but then suddenly you've got 60 days' inventory instead of 30,'' Haines said.
As further proof of this ``here today, gone tomorrow'' trend, publicly held PolyOne and Schulman each recently issued profit warnings for upcoming quarterly financial reports. Each warning came on the heels of strong early-year performance.
``A pattern of inconsistent demand seems to be becoming the nature of the industry,'' said AMI's Reynolds. ``The tough thing is, you only know a good period when you look back on it, not when you're going through it.''
Finding a balance between uncertainty and profitability has been a challenge for many compounders, including PP compounder Washington Penn Plastic Co. Inc. of Washington, Pa.
``Customers are very demanding. But at the end of the day, they want pricing that's fair, and they need some stability,'' said Washington Penn President Paul Cusolito. ``But when the price is going up every month, we can't give up on trying to raise our own prices. We have to get some margin back in the business,'' he said.
Packaging oasis
Compounding volume growth was up across the board in 2004, but moving into 2005, packaging seems a lone bright spot for makers of color concentrates and compounds. That sector's volume growth was about 4 percent in 2004, but sales were up 7-8 percent from price hikes, according to industry estimates.
``A lot of markets in packaging have been fairly consistent,'' PolyOne's Mitchell said. ``People are still buying health and beauty products and laundry detergent whether the economy is strong or weak. For example, there's still a trend toward using PET in clear shampoo bottles.''
``Packaging remains a very hot segment,'' added Steve Snow, North American business director for Clariant Masterbatches of Holden, Mass.
``Personal-care packaging like shampoos and health and beauty applications are doing well, along with household packaging like cleaners and cleansers. These are sectors that are very appearance-driven on the shelf for consumers. Anything that can distinguish helps sell the product,'' Snow said.
Consumer product makers also can give a product a new lease on life through a simple color concentrate change.
``A lot of times, a producer relaunches a product to get consumers excited,'' Snow explained. ``Changing a color or an effect is the cheapest and easiest way to do that. You can radically alter perception with a color change or a special effect like pearlescent. It's more difficult to make a new bottle, which requires a tooling change.''
Stalled cars
With automotive consuming as much as 25 percent of total North American compound demand, according to industry estimates, the recent woes of North American giants General Motors and Ford have some compounders more than a tad uneasy.
Through June, North American auto builds are down more than 3 percent vs. the same period in 2004. Most of that loss has come in truck builds, which are down almost 5 percent.
At Schulman, automotive-based business accounts for about 45 percent of total sales - although that amount was 55 percent just a few years ago. Schulman cited soft automotive demand as one of the reasons that earnings for its 2005 fiscal third quarter will be one-third lower than originally projected.
``It's a tough situation,'' Haines said. ``Business with transplants is very good, but I'm concerned about parts suppliers.''
Sales strategies on the part of the Big Three also can blur the automotive picture. Ferro generates about 20-25 percent of its compounding sales from the automotive sector.
``Automotive's been hot and cold,'' Comanita said. ``Special incentive [auto sales] can camouflage the real problem in the market and lead to swings in demand.''
The drop of GM and Ford credit to junk-bond status will make its way down the chain and affect the plastics market, according to Bill Ridenour, president of Polymer Transaction Advisors Inc. consulting firm in Newbury, Ohio.
``The worst scenario is to be a low-margin compounder in the American automotive market,'' Ridenour said. ``A lot of projects are going on the back burner.''
PolyOne's Mitchell is more positive in his assessment of the auto market: ``The auto industry has been going through this [supplier] consolidation for 20-plus years,'' he said. ``We don't expect any cataclysmic overnight changes in the processor base. It's continued evolution.''
