With 2006 winding down and 2007 on the horizon, North American compounders and concentrate makers are exuberant about packaging, concerned about automotive and uncertain, as usual, on resins and raw materials.
Packaging is providing opportunities for compounders, as their customers seek ways to grab the attention of consumers already bombarded with graphic stimulation. Automotive, a market so good for so long, has compounders wondering if the slide of 2005-06 is a lull or a new reality. And every time resin prices go up, another thin slice of margin is peeled away from the compounder's bank account.
Plastics News recently chatted with several compounders across North America before they put away their worldly concerns and focused on turkey-filled Thanksgiving feasts. The highlights are as follows:
Shiny new packaging
Steve Snow's world is filled with color. And when he talks about packaging, he gets excited.
``We're seeing a trend in household and cleaning products where they're using colors to build brands, which is the same thing that personal-care products have done for a while now,'' said Snow, North American business director at Clariant Masterbatches in Holden, Mass.
``In one-time applications, like easy-clean and easy-wipe products, everything used to be in white bottles,'' he added. ``Now colors and special effects are being used. Variety is important to people.''
``Packaging in general is a strong area if you work with the [original equipment manufacturers],'' said Robert DeFalco, president of color concentrates maker Ampacet Corp. in Tarrytown, N.Y. ``They're looking for the ability to work with you from design through production. It may take more than a year for you to get qualified, but it's not as easy to be replaced based on price.''
DeFalco mentioned growth in biaxially oriented polypropylene film, which is replacing cellophane and other plastic while offering more barrier properties in snack packaging, cigarette wrapping and medical supplies. In the grocery segment, Snow cited Procter & Gamble's decision to upgrade the standard Folgers coffee container for its premium coffee line.
``To differentiate on the shelves, Folgers saw a trend in designer premium coffees and designed a sexy new package,'' Snow explained. ``It's not red with the black top; it's a pearlescent burgundy with a gold top, like something you'd see in a coffeehouse.
``The deeper, richer color implies premium coffee. The effect is from the same multilayer blow molding used in personal-care items.''
No longer auto-matic?
As exciting as packaging may be, the automotive market may be just as problematic. North American auto and light-truck builds were down almost 2 percent through mid-November and could drop further still in 2007. This is a major issue for a compounding market that sells at least 25 percent of its total end product into automotive.
``There's obviously been a massive hitch in the auto business,'' said Michael Martin, sales and marketing manager with S&E Specialty Polymers LLC, a compounder of PVC and engineering resins in Lunenburg, Mass. ``The market is very dependent on [General Motors] and new pickup trucks. We're cautiously optimistic that the recent fall in gas prices and offers by Chevy will get things going in the right direction.''
S&E generates half its sales from the auto market. The segment is big for other players, too, such as Washington Penn Plastic Co. Inc., a compounder of PP and specialty resins in Washington, Pa.
``Automotive is one of our largest markets, so we're going to stay the course,'' said Washington Penn President Paul Cusolito.
``The market's been good to us. You just have to be careful about the customers you choose to do business with. The under-hood and interior [auto] sector is really growing. The question is if it's growing fast enough to replace previous business.''
``Auto is an important part of our business, and we're seeing the same trends as everybody else,'' said Clariant's Snow. ``Builds are probably going to go down in 2007. But design work and color selection is done four to five years in advance and we can plan accordingly.''
At the LNP Engineering Plastics unit of GE Plastics, auto-related sales actually are up 1 percent so far in 2006. LNP General Manager Nitin Apte, in Exton, Pa., said the slight rise is a result of focusing on under-hood and inside-cabin parts, rather than large parts like bumpers.
On the other hand, if you talk to the staff at RTP Co., an engineering resins compounder in Winona, Minn., you might not know the auto market is slowing at all.
``I can understand why you're concerned as a compounder if you're tied to build rates,'' said Greg Newby, RTP's vice president of marketing. ``But our auto business is growing in a big way. We're replacing existing materials, going from metal to plastic with long-fiber technology and using technology change on the interior of the vehicle.''
``There's a lot of focus also for auto interiors, dashboard components and controls,'' added RTP Vice President of research and development Steve Maki. ``We've got global reach, so we're not tied to builds in the U.S.
``Everybody's hurting if you're tied to too few wagons.''
RTP has raised a few eyebrows in the industry by making a pair of moves into downstream markets.
The firm expanded its downstream presence earlier this year through its purchase of Wiman Corp., a custom film maker in Sauk Rapids, Minn. RTP began making finished plastic products in 2004 when it opened a commercial sheet operation at its headquarters site in Winona.
The age-old conflict surrounding such moves is the possibility of competing with your own customers. But RTP officials said they've purposely steered clear of that trap.
``We're not going downstream at the expense of our customers,'' RTP's Maki said. ``Customers who do sheet and film aren't our base, so there's a minimum of conflict. Sheet materials also are a ripe market for specialty compounds.''
Buying Wiman also extends RTP into the medical field and other markets where it hasn't been before, Newby said. The firm's efforts in nanotech and inherently conductive technology now can be tailored to applications in film and sheet, Maki added.
But there doesn't seem to be a long line of like-minded compounders forming behind RTP.
``We want to add value to customers and help them,'' said Cusolito at Washington Penn. ``I don't think we can do that if we get into their downstream businesses.''
Deal or no deal?
The compounding deal that got the most attention in 2006 was one that didn't happen. Ferro Corp.'s plan to sell its specialty plastics business to private equity firm Wind Point Partners of Chicago fell through when Wind Point wanted to reduce its initial $133 million offer.
Ferro's specialty plastics business is a major compounder of PP and other materials, and has annual sales of about $275 million. When the sale fizzled in early October, officials said that Cleveland-based Ferro ``will continue to look for sensible divestment opportunities.''
``This is not a fire sale,'' said Ferro spokeswoman Mary Abood. ``We expect to get full value out of this business.''
The main issue with the Ferro deal - according to Bill Ridenour of Polymer Transaction Advisors Inc. - was that the buyer didn't change its mind about the acquisition's value until the very late stages.
``I don't think [the Ferro situation] will affect larger deals,'' said Ridenour, president of the merger and acquisitions consultancy in Newbury, Ohio. ``There are still selective buyers in the M&A market.''
The Ferro deal, along with a $175 million bid that Audax Group made for a stake in liquid-color maker ColorMatrix Corp. in mid-2006, demonstrates that ``there's a larger interest from private equity firms and only selective interest from within the industry,'' according to Ridenour.
One of the more unpredictable and public M&A sagas playing out in the compounding world is A. Schulman Inc.'s battle with Barington Capital Group LP, a New York investment firm that now owns almost 11 percent of Schulman's stock.
For the second year in a row, Barington this year threatened a proxy fight for control of Schulman's board of directors, citing a lack of leadership and poor performance of the compounder's North American business unit. That unit accounts for about 30 percent of Fairlawn, Ohio-based Schulman's annual sales, but rarely has been profitable in recent years.
Barington has backed down each time, after Schulman gave Barington a seat on its board. Schulman also initiated a stock buyback. But Barington has continued to raise its stake, even though Schulman's per-share stock price is about 30 percent higher than it was when Barington began accumulating shares in early 2005.
In addition to RTP's acquisition of Wiman and the Audax/ColorMatrix investment, Plastics News has tracked six other M&A deals that have affected the North American compounding market in the past 12 months. Three of the deals involve physical assets, while the other three cover intellectual property rights and customer lists.
The three ``hard'' deals were:
* ExxonMobil Chemical Co. sold its share in PP compounding plants in Jeffersonville, Ind., and Singapore to Mitsubishi Chemical Corp. ExxonMobil and Mitsubishi had operated the Jeffersonville plant jointly under the Mytex Polymers name since 1987. The plant is managed by compounder Chemtrusion Inc. of Houston.
* Mexichem, a maker of PVC and specialty chemicals based in Mexico City, acquired Bayshore Vinyl Compounds Inc. for $16 million. Bayshore is a PVC compounder and recycler in Tennent, N.J.
* Toll compounder Alloy Polymers Inc. bought a 100,000-square-foot compounding plant in Crockett, Texas, from Ampacet. The 100 million-pound-capacity plant makes black compounds for wire and cable. Alloy also added an extrusion line in Richmond, Va., earlier in the year.
The three ``soft'' deals included :
* Rotuba Extruders Inc. of Linden, N.J., purchased a line of specialty cellulosic compounds from Albis Plastics GmbH. The deal included formulations, customer lists and some equipment, but no property or buildings.
* S&E acquired a license for most of the PVC compounds made by Lynn Plastics LLC, a PVC compounder that went out of business in 2005. S&E is making the Lynn products in Lunenburg.
* Washington Penn buying the Amtuf-brand line of PP compounds from Innovene USA LLC. The deal included customer lists and product formulations, but no physical assets.
Moving into 2007, industry veteran Keith Rodden said that low interest rates could encourage more acquisitions. Rodden is chief operating officer of Matrixx Group, a color and additive concentrates maker in Evansville, Ind.
At Ampacet, DeFalco said he ``still gets a lot of calls'' asking if the privately held firm is on the market. Clariant's Snow said that although the North American concentrates market might see further consolidation, high resin prices could shrink profit margins, causing the valuations of smaller firms to go down as a result. This scenario might discourage the owners of small companies from selling, he explained.
PTA's Ridenour added that he would not be surprised to see a private equity firm buying several small compounders, pursuing a consolidation strategy and adding new products to increase value. That strategy usually involves closing facilities and cutting the size of the workforce.
``The compounding industry's valuation is reflective of where the plastics industry itself sits within the larger national economy,'' Ridenour said. ``In the 1970s, it was a go-go industry growing at double-digit rates. In the '80s and '90s, it still had high growth rates and higher valuations.
``Now, investors are taking a second look at the plastics industry and seeing it as a maturing field. There's still growth in select areas but not across the board.''