It may be too early for one big sigh of relief, but officials at several North American compound and concentrate makers said they believe their industry has turned the corner and is headed upward in 2010.
Orders have picked up a little bit, said Nitin Apte, general manager of specialty resins and of the LNP Engineering Plastics business at Sabic Innovative Plastics LP, a maker of engineering resins and compounds in Pittsfield, Mass. There's reasonable demand now. Relative to the watermark, we're still behind, but we're incrementally improving every month.
At PolyOne Corp., nine-month 2009 operating income was up at businesses closely tied to the North American compounding sector. Similar results essentially were flat at A. Schulman Inc. (for a full fiscal year) and at Ferro Corp., but had taken a tumble at Spartech Corp. Nine-month compounding-related sales at PolyOne, Ferro and Spartech each were down at least 30 percent, with Schulman's full-year results down a similar amount.
But executives contacted recently by Plastics News said there's been a change in the mind-sets of their customers.
Not every customer is celebrating, but they're not all negative like they were earlier in the year, said John Manuck, president of concentrates maker Techmer PM LLC in Clinton, Tenn. Now I'd say that 75 percent of them are optimistic, even if they think things will be challenging in 2010.
For the first time in a while, it's no longer gloom and doom, added Carlos Carreno, president of engineering resins compounder Infinity Compounding Corp. in Logan Township, N.J. There's more optimism now than there was 3-6 months ago. Projects had been put on hold, but customers are spending on tooling now.
Robert DeFalco, president and CEO of Ampacet Corp., a major concentrates maker based in Tarrytown, N.Y., tried to put the last 12 months in a broader perspective.
The fourth quarter of 2008 was as bad as any time I've seen in 40 years in this business, he said. But, in some respects, it was good for the industry. It made us look at costs and raw materials and finished goods inventories and made us get into shape.
Some struggle, some thrive
Before any real comeback can begin, compounders need to get a firm grip on major markets. Lately, that's been like trying to pin down a snake slathered in Crisco.
Generally, we're seeing big markets like housing and automotive bottom out, said Craig Nikrant, vice president and general manager of specialty engineered materials at PolyOne. Even automotive has picked up a little bit.
The Avon Lake, Ohio-based firm ranks as North America's largest compounder and concentrate maker.
The mid-2000s peaks of the regional housing and auto markets with 2 million housing starts and 15 million vehicle builds won't be seen for a long while, but even a marginal comeback is welcome after the bloodletting of the fourth quarter of 2008.
We're still below 2007, but we're seeing a combination of auto picking up compared to where it was and, overall, a lot of inventory restocking at the processor level, said John Moyer, president of Asahi Kasei Plastics North America in Fowlerville, Mich.
In automotive, it's about following the molds, he added. You find out where they're going, and if you're in that mold, you go with it.
Asahi Kasei has gained 23 new customers this year, according to Moyer, either from processors who weren't happy with their existing supplier or from new business.
The improvement in automotive might be more than Cash for Clunkers, according to Bob Akins, vice president of marketing and sales at DSM Engineer-ing Plastics in Evansville, Ind.
When Chrysler and GM were in bankruptcy, nothing was going in or out of those plants, Akins said. Now, some suppliers are doing well. We've picked up share and some new programs.
Demand in the automotive and durable goods markets for compounds based on engineering resins has bounced back sooner than expected, according to Joseph Gingo, president, chairman and CEO at compounder/distributor A. Schulman Inc. of Fairlawn, Ohio.
We didn't expect to see this level of recovery until mid-2010 or the 2011 [auto] model year, he said. It looks like Cash for Clunkers and similar programs in other countries have sparked a recovery.
A move toward smaller houses that are both more affordable and more energy-efficient could benefit PolyOne and other makers of PVC compounds.
Smaller houses affect the mix for vinyl favorably overall, said Rob Rosenau, senior vice president and general manager of performance products at PolyOne. Baby boomers are downsizing to smaller houses. That means more penetration for us as we work with some higher-end siding and windows makers.
And some markets proved to be more recession-resistant.
Medical and packaging stayed stable all along, said Steve Snow, North American business director at Clariant Masterbatches in Holden, Mass. Packaging is local by its very nature. If you make shampoo, you're not making bottles and shipping them back, because you'd be shipping air. Packaging will stay stable.
The medical and health-care market is definitely bouncing back, Sabic's Apte said, adding that demographic changes in the U.S. are trending toward more health care.
A major portion of our business is in packaging, said DeFalco at Ampacet. Our plans to go into rigid packaging with injection molding, blow molding and [biaxially oriented polypropylene] film have been successful.
We've seen weight taken out of some products, but we've been able to replace that adjustment with new markets. We've found pounds in other places.
In the midst of the downturn, compound and concentrate makers weren't just playing cards in their offices and hoping for the best. Several business deals and capacity additions have been announced just since February. These include:
* Schulman spending $10.5 million to retrofit and renovate its original production plant in Akron, Ohio. Fairlawn, Ohio-based Schulman first used the plant in 1929. The 164,000-square-foot plant will be used to make Polybatch-brand concentrates and other products.
* Schulman also is adding a new extrusion line for engineering plastics compounds at its plant in San Luis Potosí, Mexico, and has restored some production cuts made earlier this year at plants in Bellevue, Ohio, and Nashville, Tenn.
* Plastics Color Corp. adding a 7,000-square-foot plant within a plant specialty production area at its plant in Asheboro, N.C. PCC will add 15,000 square feet to the effort next year. The two phases represent an investment of almost $5 million by Calumet City, Ill.-based PCC.
* Amco Plastic Materials Inc. adding a new twin-screw extrusion line at its Farmingdale, N.Y., headquarters.
* Manner Plastics LP of McKinney, Texas, buying the flexible PVC compounding business of PVC Compounders LLC from investment firm Spell Capital LLC.
* Arkema Inc. of Philadelphia buying specialty compounder Oxford Performance Materials Inc. of Enfield, Conn.
* Viking Polymers LLC of Jamestown, N.C., buying ABS compounder Hughes Processing Inc. of Costa Mesa, Calif.
* Infinity will add a new twin-screw line by mid-2010. Carreno said the firm is running out of capacity.
We have a lot of small-lot customers and that means a lot of setup time, he explained. We need access to equipment because we have a lot of 1,100-to-2,200-pound orders. We're selling flexibility and speed.
Infinity also hired an application development specialist earlier this year and will add another sales rep and internal support personnel in 2010.
* Ampacet has focused on international markets, opening a new plant in China this year and planning to add plants in Brazil and India next year. (See related story on Page 9.)
* Citadel Plastic Holdings Inc. kept its buying spree going in September when it bought Fiberfil Engineered Plastics Inc. of Stoney Creek, Ontario. It's the fifth compounding-related deal for Radnor, Pa.-based Citadel in less than three years.
Citadel soon might have company in the compounding and concentrates mergers and acquisitions arena, since Schulman's Gingo said his firm is looking to make acquisitions in the North American masterbatch market.
We're number one in masterbatches in Europe and Mexico, and there's no reason we can't do the same in the U.S., he said. We have cash available and can finance it if there's value there for an acquisition.
But growth and deals sometimes came with a price. The Manner-PVC Compounders deal resulted in the closing of three plants. Single plants closed in the Viking-Hughes and Citadel-Fiberfil deals as well. Two other firms Cereplast Inc. of Hawthorne, Calif., and Paris-based Rhodia Group each announced they would close their North American compounding operations and turn their compounding work over to toll compounders.
PolyOne also produced better results after cutting almost 400 jobs and closing plants in Niagara, Ontario, and Plaquemine, La., and part of a plant in Avon Lake since July 2008. Schulman also has cut 160 jobs since late 2008 and temporarily reduced the output of its Bellevue and Nashville plants.
In the concentrates field, Clariant closed smaller plants in Lachine, Quebec, and Milford, Del., eliminating about 40 jobs, and Ampacet Corp. shuttered a small plant in Vancouver, British Columbia.
Even after these closings, there's a general perception that North America remains burdened with excess capacity for compounds and concentrates.
There's a glut of compounding in the U.S., said Apte at Sabic. Everybody's adding capacity overseas without rationalizing old equipment or moving equipment from place to place.
At Clariant, Snow described the firm's plant closings as right sizing of the business to meet demand.
We had to optimize our production network in situations where overcapacity was a factor, he said.
Gingo said that Schulman's cuts also were necessary, but that they ultimately helped the company.
We cut capacity by one-third or more, so we don't have as much [capacity] to fill, he said. But we walked away from some high-volume, mineral-filled polyolefins business that wasn't profitable.
Changes in attitudes
Many North American compounding and concentrate firms have had to adjust to customer buying patterns that increasingly can swing from meager to frantic at the drop of a hat.
We get a lot of emergency orders where someone needs 10,000 pounds in a few days, Asahi Kasei's Moyer said. We try to do it where we can.
Becoming a small-lot producer to meet these demands creates a challenge, according to Snow at Clariant, because producers then need smaller extruders to run efficiently and need a variety of raw materials on hand. In such cases, lead times often are shrunk from 10 days to between three and five, he said.
At PolyOne, Nikrant said the firm has benefited from its decision to build a specialty materials plant focused on small-lot customers in 2006.
We're already prepared to some degree, he said. We can adapt pretty well.
In some cases, customers can't build inventory even if they want to, because banks or other lending institutions have tightened their lines of credit.
You don't see a lot of pre-buy activity, said Apte at Sabic. Customers are more cash-conscious than they ever were.
Customers with money have learned to run with less inventory, added Gingo at Schulman. They learned they can do it and not go back to the days of having material on hand and hoping they might sell it.
But the credit situation also affects rival compounders and Moyer said he believes Asahi Kasei has benefited as a result.
You can gain or lose, he said. I feel that we're gaining from competitors' inability to supply or from their financial problems. Some of them have a hard time getting a good credit rating or have problems with cash flow. Banks don't want to lose big.
Another change among customers is the loss of important technical personnel in moves caused by a need to cut staffing. These steps have made it more difficult for compounders to launch new materials or programs.
Some of our accounts have downsized so much that they don't have the people to try new materials, said Akins at DSM EP. They'll say they want to be in on a manifold project, but then they'll have to take a step back.
Some companies are letting key technical people go, and that's very damaging, added Manuck at Techmer. Cycles come and go, but if you cut close to the bone, it doesn't grow back.
If you're in compounding in the U.S., you have to produce technologically innovative products. If you're in commodity products, you're not going to last, Manuck said.
You can't just focus on tonnage, though that's been the trend in the industry. There has to be a focus on high-performance products, he said.
How much for resin?
Executives were split on the impact of resin price hikes that have hit the market during 2009. The increases came after prices plummeted in the fourth quarter of 2008 but they also came while demand remained weak, going up only from raw-material increases and sales to export markets.
The resin thing is frustrating, said Manuck at Techmer. In areas like polypropylene, short-term thinking is damaging the entire industry.
Pricing has been an issue because of its lack of stability, added Infinity's Carreno. But you never can count on pricing.
At Sabic, Apte said pricing has not had much impact.
I don't think increases in resin price have slowed the comeback, he said. We've managed those costs accordingly.
Rosenau saw the same picture at PolyOne.
Resin prices didn't affect our business this year, he said. It was more a matter of a lot of suppliers and customers hunkering down and getting back to basics.
Modest growth ahead
Longer-term growth in the North American compounding sector is expected to be modest. Annual growth at independent compounders those not affiliated with a resin producer or processor is expected to average just under 4 percent between 2009 and 2014, according to a recent market study by BCC Research of Wellesley, Mass.
Independent compounders are expected to produce 11 billion pounds of material this year and slightly more than 13 billion pounds by 2014, according to BCC.
And the market hasn't been without its bright spots in 2009. Apte said that new grades of Sabic's Farradex-brand compounds can provide better shielding at equivalent costs and equivalent shielding at lower costs. Akins has been encouraged by DSM EP's ability to double sales of compounds based on high-temperature nylon for electrical components and connectors. Rosenau pointed to PolyOne's ability to provide a customer with $600,000 in annual savings by creating a metallic finish for washers and dryers.
Perhaps more importantly, customers now are returning phone calls.
A lot of companies had put research and development and capital expenditures on hold in the downturn, said Nikrant at PolyOne. Now with the upswing, we're being called in to talk to the engineering and marketing folks for new ideas.
We've done more customer seminars and webinars lately, said Sabic's Apte. We've had more interaction with customers in the last 3-4 months than we did in the entire first half.
In November , it felt like the world had ended, added Gingo at Schulman. Now I'm a lot more optimistic.
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