If North American compounders were asked to pick a Word of the Year for 2008, the word ``unprecedented'' would get a lot of votes.
That's how compounding executives describe what's happening to them on the raw materials front. Most of the impact has come from higher resin prices, but they're also being squeezed by higher prices for pigments and additives, and higher freight costs as well.
``In the first half, we never worked so hard to stay in one place,'' said Nitin Apte, general manager of the Exton, Pa.-based LNP Engineering Plastics unit of Sabic Innovative Plastics. ``There were slow spots in business, but at the same time we're now writing new business. These last four or five months have been unprecedented.''
(There's that word again.)
Plastics News recently spoke with several executives throughout the multifaceted compounding market and sounded them out on a range of timely topics. The results are as follows:
Ampacet Corp. President and Chief Executive Officer Robert DeFalco isn't one to mince words.
``We've never seen this before,'' DeFalco said of price hikes that have hit his firm's primary materials, including polyethylene, polypropylene, carbon black and titanium dioxide. Tarrytown, N.Y.-based Ampacet ranks as one of North America's largest makers of color compounds and concentrates.
``If you didn't pay as much attention to [pricing] before, you really got caught,'' he said. ``It's our most important expense and we have to manage it as best as we can.''
The heart of the challenge is in compounders' ability to pass the increases on to their customers and their customers' ability to do the same.
``When we meet with our customers, it's the same as when we meet with our raw material suppliers,'' said John Moyer, president of Asahi Kasei Plastics North America Inc., a compounder of PP and engineering resins in Fowlerville, Mich. ``We have to pass on costs all through the chain, and until that happens, some of our customers and competitors probably will go out of business.''
In some cases, compounders have price increase clauses written into supply contracts with their customers but even if they do, that doesn't always cover additional fuel-based increases for freight costs.
Recent broad price hikes on items ranging from gasoline to food have helped a little in convincing customers of the necessity of higher compound prices, according to a number of executives.
``In a way, customers have been more willing to accept price increases because everyone's doing it,'' said Joseph Gingo, chairman, president and chief executive officer of A. Schulman Inc., a leading compounder based in Fairlawn, Ohio.
``There is more of an understanding out there, but raising prices is still our last option,'' added Steve Snow, North American business director for Clariant Masterbatches in Holden, Mass. ``But we're seeing double-digit increases from all resin and pigment suppliers, and I don't see the pressure relenting in the third and fourth quarter.''
``Intellectually, the value chain gets [the need for increases],'' said Rob Rosenau, vice president and general manager of PVC compounds for PolyOne Corp., an Avon Lake, Ohio-based firm that ranks as North America's largest compounder. ``But downstream, it's hard to get those increases at big [original equipment manufacturers] and big-box retailers.''
Resin price hikes have affected the bottom line at several publicly owned compounding businesses. Recent financial results from Schulman, PolyOne, Spartech Corp. of Clayton, Mo., and Cleveland-based Ferro Corp. show operating income down at least 50 percent in businesses connected to the North American compounding market. ICO Inc. of Houston showed improved operating income in recent months.
PVC is ``a little advantaged,'' according to Rosenau, because half of its molecule is composed of chlorine, which isn't part of the petroleum chain. He also said it's crucial for compounding firms to stay close to their customers in the current market, regardless of tension and uncertainty.
``When we come out of this, if our customers aren't doing OK, we're in big trouble,'' Rosenau said. ``We have to do everything we can to make our customers successful.''
It certainly hasn't helped that the North American automotive and construction markets two major users of compounds have been in a free fall for all of 2008 so far.
``This is the worst automotive has been in my personal recollection,'' said Gingo, who spent more than 30 years at Goodyear Tire & Rubber Co. before taking the top spot at Schulman in January. ``It's just a total shift. They've taken a whole dominant sector like light trucks and SUVs and just closed it.''
Gingo added that even if smaller vehicles use a higher percentage of plastic, they consume less volume than the larger vehicles did. This move away from automotive led Schulman to close an auto-heavy plant in St. Thomas, Ontario, earlier this year, and has led Sabic IP to ``step away'' from large-part PP applications, according to Sabic's Apte.
Asahi Kasei has benefited from business with foreign-based autoworkers, but Moyer acknowledged the overall U.S. auto market is struggling, with production set to fall by more than 2 million vehicles between 2007 and 2008. Asahi Kasei generates more than half of its annual sales from the auto sector.
``There could be more of a bottom in automotive,'' Moyer said. ``The market doesn't have the capability to make the kind of cars people want to buy right now and [has] too much of others. It's riding a wave and always behind.''
U.S. sales of new homes peaked at 1.3 million in 2005 but plummeted to 775,000 in 2007 and are on pace to be under 600,000 this year, according to the National Association of Home Builders in Washington. The slowdown has affected sales of compounds and concentrates into wood composites and numerous other items.
There is some hope
As downcast as the market is in automotive and construction, it's rosy when compounders discuss opportunities in the packaging and medical markets.
``Packaging isn't recession-proof, but it is recession-resistant,'' said Gingo at Schulman. ``We really underestimated the potential for packaging in the U.S. and Canada. There's a huge opportunity for our company.''
Gingo is putting Schulman's money where his mouth is, with plans to open a new plant in the Midwest by the end of the year, focused on additive masterbatches for the packaging field.
The site's location remains undecided, but Gingo said it probably won't be in Findlay, Ohio, where Schulman shelved plans to install an automotive sheet plant at a newly constructed building.
Ultimately, Gingo wants Schulman to have the same strong presence in North American packaging materials that it has in Europe and Mexico.
Clariant's Snow said, ``Packaging remains strong and we continue to make inroads in personal care, food packaging and special effects. Medical continues to grow it's been the shining star in our portfolio this year.
``We're selling material into catheters, [intravenous products] and other devices. That segment is growing in high single digits.''
Sabic IP's Apte added, ``Health care is a very positive market for us. With the growth of noninvasive surgery, people want to get out of the hospital quicker and that's led to increased use of plastics.''
Sabic IP's LNP unit is selling carbon- and glass-filled nylon compounds into the medical market, along with lubricated grades of its Ultem-brand polyetherimide. Its Faradex line of shielding compounds also has been used by the U.S. military in Iraq to determine whether someone has a concussion.
Focusing more on specialty markets has allowed PolyOne to avoid the price battles it used to fight in other markets, according to Craig Nikrant, vice president and general manager of the firm's specialty engineered materials business.
``When customers are talking to us about carbon properties replacing lead, performance is more important than price,'' Nikrant said. ``Before, we had a lot of auto and appliance work where we spent too much time on cost substitutes. Now we're more focused on new materials like Tritan [copolyester from Eastman Chemical]. It's not all about finding the cheapest nylon regrind.''
Spending not ending
In spite of the heavy layer of pricing pressure, North American compounders are looking for ways to expand and grow their business. In the first half of 2008 alone, five transactions took place, including:
c Private equity firm Wind Point Partners LLC of Chicago buying Bulk Molding Compounds Inc., a thermoset resin maker and compounder in West Chicago, Ill. Wind Point made the deal through its Citadel Plastic Holdings Inc. unit.
c Infinity Compounding Corp. founders Carlos Carreno and Tim Carroll buying a majority stake in the engineering resin compounder based in Logan Township, N.J., near Bridgeport, from custom injection molder Seitz Corp. in Torrington, Conn.
c Plasticoncentrates Inc., an engineering resin compounder and concentrates maker in Chester, Pa., buying the compounding business of PlastiScience LLC in Smyrna, Del.
c Color concentrates maker Techmer PM of Clinton, Tenn., purchasing Accel Corp., a color concentrates maker with locations in Avon, Ohio, and Naperville, Ill.
The Wind Point/BMCI deal comes a year after Wind Point bought Matrixx Group Inc., an Evansville, Ind.-based firm with locations in the U.S. and Europe. Officials with Wind Point said the firm plans to build a global plastics compounding company, opening the door for further acquisitions.
Most recently, Clariant bought Rite Systems Inc. and Riton Colors Inc., two West Chicago firms with shared ownership and production of liquid color and color compounds.
The businesses employ 150 and operate plants in West Chicago; Mooresville, N.C.; and Chino, Calif. Existing management is expected to remain in place at Rite and Rincon, which have combined annual sales of about $50 million.
Clariant's Snow said Rite/Rincon is a ``nice, complementary'' acquisition for Clariant, which might be interested in making other purchases.
``We're going to keep our eyes open,'' he said. ``There are still potential candidates out there.''
New plants also are on the horizon in spite of short-term challenges.
In addition to Schulman's Midwest effort, Asahi Kasei wants to have two new plants one in the southern U.S. and one in Mexico in place by 2015, Moyer said. Penn Color, a color concentrates maker based in Doylestown, Pa., also wants to add a Midwest location in 2009, according to thermoplastics industry manager Robert Kaminski.
The Asahi Kasei plants are needed to handle additional work from transplant auto makers, while Penn Color wants to be able to compete more directly with regional players.
Both firms also are expanding at their main locations. Asahi Kasei will add a 10 million-pound-capacity line for engineering resin compounds in Fowlerville by the end of 2009. Penn Color will add a high-volume line in Hatfield, Pa., this month to increase production of specialty polyolefin concentrates for packaging and building products.
Sabic IP added long-fiber development lines in Exton for research and development purposes. The company said it also plans to expand commercial production and upgrade color matching capability in Thorndale, Pa., and Columbus, Ind., through newer, more efficient plant equipment.
Clariant also continues its policy of replacing 15-20 percent of its manufacturing equipment including extrusion lines and mixers each year.
Future investment is likely to come from within the industry instead of from outside investors, according to Steven Schwartz, a market analyst with First Analysis Securities Corp., a research firm in Chicago.
``The compounding industry is in a difficult position, and only a strategic buyer can get out of this mess,'' Schwartz said. ``A private equity company needs to consolidate and trim heads in order to make money.
``The market is going to come back,'' he added. ``It's just a matter of digesting what it's swallowed.''
The weak dollar also could make North American compounding firms attractive to Asian or European compounders looking for a presence in the market, industry watchers said.
And although the drumbeat for consolidation has been a consistent one in the North American compounding industry, it's not always acted on.
At Sabic IP, Apte said that some compounders ``are running for cash just to pay their bills.'' Asahi Kasei's Moyer agreed, saying that those firms ``could hurt the overall business if they keep operating for cash.''
But Ampacet's DeFalco pointed out that compounders don't always learn from experience.
``There are some companies that are running for survival,'' said DeFalco at Ampacet. ``But I've been doing this long enough to know that if one masterbatch company goes, another one takes its place.''
One area that hasn't suffered in this challenging year is new product development.
``We're not taking our foot off the pedal,'' PolyOne's Nikrant said. ``There are tremendous opportunities out there based on specialty compounds.''
Nikrant added that PolyOne is taking steps to model its other specialty efforts after GLS Corp., the long-standing thermoplastic elastomer compounder that PolyOne acquired late last year.
``R&D hasn't slowed down one bit,'' said Snow at Clariant. ``In some ways, we're doing more with trying to differentiate and gain market share because we're not getting organic growth.''
Penn Color has increased its new product development work in efforts to increase the strength and lower the letdown of its concentrates, Kaminski said.
``Customers want to buy pigment from us they don't want to buy resin,'' he explained. ``So they need higher loadings. We need to take market share with new products or we're losing the battle.''
2008 also has brought with it challenges to the larger plastic industry including bag bans, concerns about the safety of bisphenol A feedstock and questions about plastics' use of resources such as oil and natural gas. These challenges haven't gone unnoticed by compounders.
``The environmental issue is a bigger threat than the economy,'' said Gingo at Schulman. ``These are more than petroleum issues, and we need to do a much better job of communicating with the public.''
During his lengthy career in PVC, Rosenau said that he's seen anti-plastics efforts go in cycles.
``I've seen the market pull away from vinyl and then come back again because other materials didn't perform as well,'' he said. ``There can be just as many negative impacts from other materials.''
Rosenau also pointed out that recent coverage of the safety of PVC shower curtains included skepticism from mainstream media that questioned the science behind the alleged risks.
``I think previously you might not have seen that kind of questioning,'' he added.
Another area of concern for DeFalco at Ampacet is the shift of product segmentation to the lower end of the quality curve. This lower end traditionally covered about 20 percent of the overall market for any given product, but DeFalco said it now includes as much as 35 percent of the total.
``People have lowered expectations,'' he said. ``In selling masterbatch into trash bags, [customers] used to look through the bags to check dispersion, but they don't always do that now.
``It affects us because it sometimes can be more difficult to produce material for the lower end. You get lower quality material and you can get inferior results.''
Making it through
Ultimately, North American compounders might be affected by the mind-set of the average consumer.
``When does a consumer get to a point where he buys a razor without a thermoplastic elastomer handle?'' PolyOne's Nikrant asked. ``Does he ever get to that point?''
And Moyer at Asahi Kasei came as close to an economic prediction as any compounding executive would get.
``Companies need to make it through the end of 2009,'' he said. ``And to do that, some of them are going to have to make some real changes.''