North American resin distributors are hoping to rebound in 2009 after being battered and bruised in the second half of 2008.
The amounts of nylon, polypropylene, polystyrene and linear low density polyethylene sold by distributors each fell more than 10 percent in the first 11 months of 2008, according to the American Chemistry Council in Arlington, Va. Distributor sales of high density PE slipped almost 10 percent and of low density PE were down more than 4 percent.
Distribution, reselling and compounding accounted for an eye-opening 27 percent of U.S./Canadian nylon sales in the nine-month period. Distribution and reselling generated almost 10 percent of the region's PS sales, while pure distribution provided more than 6 percent of its PP sales and 4-5 percent of sales of HDPE, LDPE and LLDPE.
All of this came amid a backdrop of resin prices that shot up along with prices of oil and natural gas in the first half of 2008, only to collapse in the second half as the global recession took hold and processors stopped buying resin.
In recent interviews with a number of North American resin distributors, the topic of gaining business as resin makers cut back their own operations and as processors consume smaller amounts of resin came up numerous times.
``You're always hopeful that's going to happen,'' David Der Hagopian of Entec Polymers said of the possibility of more volume going to distribution. ``If the resin makers have to outsource, historically that's what happens.'' Der Hagopian serves as president of Entec, an engineering resins distributor in Maitland, Fla.
``As resin companies look at structural costs and find ways to extract those costs, they might reduce personnel,'' said Michael Rademacher, vice president of distribution at PolyOne Corp. in Avon Lake, Ohio. ``They could give a block of medium and smaller accounts to distributors.''
Kevin Chase, president of Chase Plastics Services, an engineering resins distributor in Clarkston, Mich., said that some smaller resin accounts could be turned over to distributors ``because dynamics at processors change so quickly.''
``Margins today aren't what they were 20 years ago,'' Chase said. ``Now, resin makers want distributors to be an extension of their own company. They only want a few channel partners, but they want to be attached at the hip.''
Resin makers ``typically can't do what we do, and they wouldn't do it if they could,'' added Ed Holland, president of commodity resins distributor M. Holland Co. in Northbrook, Ill. ``They don't want to sell just half a million pounds or the occasional car or an emergency bulk truck.''
``There's an opportunity for us in this marketplace,'' said Michael Gilbert, vice president of Ashland Distribution Co. in Dublin, Ohio. ``Some customers want a truck or a half-truck or less, so the ability to handle inventory is a sweet spot for distribution business.''
Credit where it's due
Another major issue rearing its head in the 2009 distribution field is the creditworthiness of customers, both existing ones and ones that may arrive unannounced. When processors file for bankruptcy, resin distributors often end up on the lists of largest unsecured creditors.
Credit always has been a touchy issue with distributors, but it became even more so in 2008 as financial straits grew dire for many customers.
``We're a little more wary when we get cold calls,'' said Alan Woll, president of engineering resins distributor Network Polymers in Akron, Ohio. ``We're very cautious with credit, but we still need to police our accounts vigorously. We visit our customers frequently to see if everything's OK.''
Resin Distribution Inc., a distributor of commodity and engineering resins in Ayer, Mass., has had to drop some customers and decline some new business because of credit concerns, according to co-owner Regis Magnus. At Ashland Distribution which had global plastics and chemicals sales of more than $4 billion in fiscal 2008 Gilbert said the business ``hasn't seen a significant spike'' in credit-related problems, but he added that the current marker ``is going to challenge customers from a cash flow standpoint.''
``We manage credit internally and work with our sales organization to understand risk,'' Gilbert said. ``If you're not taking risks, you'll never grow your business but you have to make sure the risk you're taking is worth it.''
M. Holland recently added staff to its credit department in anticipation of ``enforcing its policies more diligently,'' Ed Holland said. PolyOne's Rademacher added that his firm assesses creditworthiness to decide if we still want to do business with someone.''
``Getting new business is a good thing, but some accounts are risky, especially in the automotive sector,'' said Rademacher, who heads a unit that posted sales of $624 million and operating income of $22 million in the first nine months of 2008. ``We've tightened our credit policy and tightened our terms on existing accounts.''
``A lot of our customers can't use receivables as collateral anymore,'' Chase said. ``That affects their ability to borrow and then their ability to pay.''
``Customers are asking for lead times shorter than four to six weeks,'' said Bill Woodyard, vice president of sales and marketing at Network in Akron. ``Because of price instability, they're willing to pay a premium for smaller lots.''
Entec's Der Hagopian pointed out that this transfer of risk is nothing new in the resin distribution market.
``Distribution customers tend to be smaller customers, and not all of them are financially solid,'' he said. ``But resin producers have been offloading riskier accounts to distribution for a long time. That's how resin distribution grew.''
Many resin distributors got squeezed in 2008 by swings in resin pricing that went upward in the first half of the year, only to crash in the second half. That second-half crash left a lot of distributors with resin that no longer was worth what they'd paid for it 30 days earlier.
But the very nature of being a resin distributor requires that inventory be on hand when customers need it. In this sense, a lot of distributors had their hands tied when prices gyrated.
``We have to carry 60 days of inventory,'' said Der Hagopian. ``But then you're selling for 40 [cents per pound] what you bought at 80. There's always a lag with pricing and inventory.''
``We were challenged by price on the way up and on the way down,'' added PolyOne's Rademacher. ``But we have to have inventory for next-day delivery.
``Demand deteriorated in the second half, and the combination of tailing inventory and high-cost material created margin compression,'' he said.
``Then there were unprecedented resin [demand] decreases and prices weren't going down fast enough,'' Rademacher said.
Ed Holland said his firm and others ``aren't being rewarded for being a stocking distributor.''
``We have significant inventories, and last year that meant high-priced inventory,'' he said. ``But if you're not stocking inventory, you're not a distributor. It's like if you're a grocery store you have to have vegetables.''
Adding to selection
When they weren't fretting about inventory, pricing and credit in 2008, distributors found time to grow their businesses. Growth steps included :
* Ashland Distribution in October opened a new warehouse in Monterrey, Mexico. The firm also has hired 15 sales reps in China since late 2007.
* Chase Plastics Services added 30,000 square feet to its warehouse in South Bend, Ind., and hired seven new sales and market development personnel at its Clarkston headquarters. Chase also last year began distributing thermoplastic polyurethane for Huntsman Corp.
* M. Holland expanded its lineup by adding rotomolding-grade PE resins from Nova Chemicals Corp. and ABS and styrenic block copolymer resins from BASF Corp.
* Jamplast Inc. of Ellisville, Mo., in March added biocomposites based on PE, PP and PS to its distribution lineup. The biocomposites are made by JER Envirotech International Corp.
So what's the best approach to take in 2009? Distributors were somewhat split on that thorny topic.
``Customers will continue to want as few inventory assets on floor as possible,'' said Rademacher at PolyOne. ``That will help their cash and cash flow, and cash will be critically important in '09.''
``Customers are looking at all options to reduce their costs, not just price per pound. They might look at a generic grade or a different polymer for an application. And they don't need a full truckload of resin because that becomes inventory.''
``We're going to add some new grades from our existing suppliers,'' Der Hagopian added. ``But overall '09 might be a good year to sit tight and see how things shake out.''
Ed Holland said he's being cautiously optimistic about what his firm can achieve in 2009.
``Our business might be down 10 percent, but the 90 percent that's out there is really massive,'' he said.
2009 ``is looking to be a difficult year,'' according to Gilbert at Ashland. ``We don't expect demand to rebound significantly, but then again no one would have predicted such a rapid decline in '08,'' he said.
``Global [resin] demand is way off and it might not be coming back any time soon,'' RDI's Magnus said. ``People are finally waking up to the fact that they can't charge everything anymore.''
The inexperience of some distribution sales representatives might be playing a role in the perception of the current market, according to Woll.
``There are people in straight [resin] distribution who've never lost money,'' he said. ``They've never been through this so they don't know what it's like.''
At Chase, Kevin Chase is breaking from the pack with a brighter outlook.
``I'm very excited and optimistic about our position in the industry,'' he said. ``We're positioned pretty well because producers have cut back resources so much and replaced technical expertise.
``I'm not going to write the year off like a lot of people are but some cooperation from the economy would be nice.''