The North American resin distribution market continued to grow in 2006, even as resin price swings kept buyers dizzy and some major deals changed the competitive landscape.
Through September, North American sales of polypropylene to distributors totaled more than 900 million pounds, a leap of almost 40 percent vs. the year-ago period, according to the American Chemistry Council in Arlington, Va. Sales of polyethylene to distribution channels also were up more than 5 percent, surpassing the billion-pound mark.
Expanding the market to include resellers adds 2.8 billion pounds of PE and 1.1 billion pounds of PP to the mix.
High feedstock prices impacted sales of polystyrene to distributors, which fell about 6 percent to less than 500 million pounds. And a weak automotive market prompted sales of nylon to distributors to sink about 15 percent to less than 150 million pounds.
All of this took place in a 2006 pricing environment that saw prices decline early and late with a rise in the middle. Needless to say, this movement kept distributors on their toes.
``Sales were up more than volume'' in 2006, said Michael Rademacher, vice president of distribution for PolyOne Corp. in Avon Lake, Ohio. ``But if you look at what happened with pricing in general, volume held up pretty well.''
In the first nine months of 2006, PolyOne's resin distribution unit rang up sales of almost $566 million, a jump of about 12 percent from the year-ago period. The unit's nine-month operating profit also increased from $13.5 million to $15.6 million. PolyOne's sales total ranks third in the North American resin distribution market, according to industry estimates.
``Customers are looking for solutions to the challenges they face,'' Rademacher said. ``They want us to do more than just match price, they're looking for help in material substitutions and other areas.''
At Ashland Distribution Co., growth has been balanced between commodity and engineering resins, according to Michael Gilbert, vice president with Dublin, Ohio-based Ashland.
``We've got customers who buy both polypropylene and polycarbonate or both polyethylene and nylon,'' he said.
Ashland doesn't report separate resin distribution totals, but Gilbert said the unit's sales have increased by $700 million since 2002 and by $170 million since 2005. Industry estimates rank Ashland second in the region with more than $1 billion in annual resin-related sales.
``An important part of our success is the broad line we carry,'' Gilbert said. ``We stock everything from polyethylene and polypropylene to liquid crystal polymers and PPS and other highly engineered materials.''
Chase Plastic Services Inc., an engineering resins distributor based in Clarkston, Mich., expects to post sales of $90-100 million in 2006, even though sales slowed down a bit in the second half of the year, according to company president Kevin Chase.
``We saw double-digit growth in dollars and volume in pounds,'' he said. ``We're not a major automotive player, but car builds were down and that affected us and other distributors. Overall [gross domestic product] growth also slowed in the second half.''
In Ayer, Mass., a 15 percent jump in sales will provide distributor Resin Distribution Inc. with about $60 million in sales for 2006, according to co-owner Regis Magnus.
RDI's profit margin was off slightly in 2006, Magnus said, as early-year price drops left distributors and processors with high-priced inventory that they needed to work off. In RDI's case, that meant the firm had to reduce its inventory by almost 40 percent between May and December.
``We want to turn our inventory over every 45 days,'' Magnus said. ``If we can do that, we're in good shape.
``But overall we don't have the growth we used to have in North America,'' added Magnus, who's been active in the industry for more than 30 years. ``The economy's growing at 2-3 percent and there aren't a lot of new resin plants.''
Move changes market
The deal that has everyone talking in the North American distribution field happened in June, when European distribution giant Ravago SA bought into Muehlstein Holding Corp., the Norwalk, Conn.-based firm that leads the North American market with annual resin distribution sales of $1.4 billion.
The size of Ravago's investment was not revealed at the time, but later filings with the European Union said that Arendonk, Belgium-based Ravago acquired ``control of the whole of [Muehlstein] ... by way of purchase of shares.'' Officials with Muehlstein could not be reached for comment.
Ravago already owned a 49 percent stake of Entec Polymers LLC, the Maitland, Fla.-based distributor that became a dominant player in April when it merged with resin distributor North American Group Inc. of Newton-Mass. The combined Entec-NAG has annual sales of more than $1 billion.
It's unclear how the Ravago-Muehlstein-Entec-NAG group - which could have North American sales of more than $3 billion annually - will divide sales of common materials among common accounts. Industry sources said that the Ravago-Muehlstein group may have affected Dow Chemical Co.'s recent decision to end its supply agreement with Ashland, after the two firms worked together for more than 30 years.
``In the situation we face today, Dow forced customers to make a change,'' Ashland's Gilbert said. ``Customers now will have to go with a different manufacturer to continue their business with Ashland. [Customers] will make decisions based on individual needs and criteria, but that can be difficult in some cases.''
One industry source said that he believes that Muehlstein ``went to Dow and said `Why are we supporting a competitor [in Ashland] by growing this market?'''
Dow still works with PolyOne as well as Muehlstein, but sources said Midland, Mich.-based Dow might be contemplating going with only one distribution partner. In that case, the larger Muehlstein would have the advantage over PolyOne.
PolyOne's Rademacher said his firm ``has heard nothing from Ashland'' about any potential change. He added that PolyOne already has ``multiple suppliers of product'' in case of a plant outage or natural disaster or similar situation.
``We're not impacted by other deals,'' Rademacher said. ``We're very focused on our own business.''
At Chase, Kevin Chase said the Ravago-Muehlstein deal could have ``a huge impact'' on the North American resin distribution field.
``The distribution industry is in its fourth decade, and the new model says that because of the decreasing processor base, there's going to be consolidation,'' he said. ``Distributors have to decide how they're going to survive financially in this industry and resin makers are reviewing how they go to market.
``If you look at it from 10,000 feet, you can see the network is changing,'' Chase added. ``Resin makers are now looking and saying `Who's going to be my partner in the future and how many partners do we need?' Some might say they need only one.
``When you look at the low margins of resin producers, they might say `If we're doing the application development work, why do we need a big sales force?' ''
RDI's Magnus also questioned how Ravago-Muehlstein will operate.
``Muehlstein says they're buying better now, but I don't know if they can,'' he said. ``With that whole network, you could have five guys calling on the same customer. They're competing with themselves.''
Ashland's Gilbert said that it was ``too soon to know how mergers will change the market.''
``From our perspective, scale is important, and distributors will have to decide what they want to do,'' he explained. ``Do they want to be a niche supplier or do they want to have the scale and scope needed to compete in the larger marketplace?''
Even though the recent flurry of deals may lead to a rough adjustment period, sources said the market has needed such a move for some time.
``There's been consolidation in every part of the supply chain as [processing] business has migrated out of the country,'' Rademacher said.
Things to depend on
Elsewhere, some challenges facing the resin distribution market remain the same. Customers are still providing logistics challenges, and resin makers look to distributors for solutions.
``Providing customers with delivery options is the crux of our business,'' said Gilbert. ``Some want daily deliveries. For one customer, we do 400 deliveries a month. We buy, store and break down, using more than 70 warehouses and 30 suppliers.''
Rademacher said that by dealing with 20 major resin suppliers, PolyOne's combinations of delivery options ``are endless.''
``Customers rely on us for warehousing - that's part of the distribution value proposition,'' he said. ``We have to manage lead times from [resin] suppliers and each customer has his own set of needs around materials. We offer next-day service from 24 major warehouses.''
``The key is adaptation. We need constant adaptation in order to stay close to our customers.''
Financially, a processor might be able to get better credit terms from a distributor than from a resin maker, Chase said. Rademacher pointed out that working capital and cash flow are ``big issues'' with customers, many of whom buy only as needed. As a rule, distributors are better equipped than resin makers to handle such conditions.
Some processors, according to Gilbert, prefer to buy from distributors so they can manage a combined basket of products and prices with one source.
``There's so much activity that it can be tough to track,'' he said.
And resin pricing, of course, remains a thorn-filled maze for distributors to negotiate.
``Somehow, we need to stabilize prices, but don't know if we'll ever do it'' Magnus said.
``Over the past three years, we've spent a lot of energy on managing price,'' Gilbert said. ``That's time we would have preferred to spend on new markets and new applications, but that's the reality of the marketplace.''
Moving into 2007, both Gilbert and Rademacher said they expect demand growth to be more moderate than it was in 2006. Gilbert anticipates solid growth in thermoplastic elastomers, and sees more plastic penetration into the auto market, even with build numbers down.
Chase said 2007 can bring growth in medical and high-end consumer products, as well as in office furniture and automotive.