Resin distributors anticipate wave of new capacity will continue

North American resin distributors are having another good year in 2014 — and industry executives are confident they can keep that run going into 2015 as well.

The distribution unit of Avon Lake, Ohio-based PolyOne Corp. saw its sales grow 4 percent in the first nine months of 2014 to $852 million. A similar business at Fairlawn, Ohio-based A. Schulman Inc. saw its sales in the Americas grow more than 4 percent to more than $47 million in the fiscal year ended Aug. 31.

Commodity resin sales in the region via distribution grew 14 percent in the first nine months of 2014, to more than 3.2 billion pounds, according to the American Chemistry Council. Distribution sales of linear low density polyethylene led the way, surging 35 percent to almost 700 million pounds. Sales of LDPE and polypropylene through distribution each grew 12 to 17 percent in that period, with the smaller PVC sector — consisting of resellers — growing 52 percent.

High density PE sales via distribution also ticked up 2 percent in that period. The only regional commodity resins selling less through distribution in those nine months was just polystyrene, where sales were down 8 percent.

Sources of growth

“We're up in all polyethylenes, including HD,” distribution veteran Ed Holland said. “Business is growing and the economy is getting better. Distribution is growing faster than GDP.”

Holland, owner of M. Holland Co., a leading distributor based in Northbrook, Ill., has a point there, since U.S. GDP growth remains in the low single digits. Distribution sales apparently are benefiting from both resin makers and processors wanting to diversify their supply options.

“Our film business is up big and a lot of that is in linear low [density PE],” said David Skoczen, senior vice president and general manager at H. Muehlstein & Co. Inc. in Wilton, Conn. “It's a combination of [resin] producers wanting to grow their business not only in volume, but in number of users.

“The polyethylene guys are coming come out with newer materials, and [distributors] can get them to second-tier or third tier users,” he added.

The boost in distribution-based LLDPE sales could be a function of resin makers introducing high-performing grades of those materials and of them getting “higher promotion” as a result, according to Jake Thornton, vice president of Thornton & Co. in Southington, Conn.

“There are more types [of LLDPE] in the marketplace,” he said. “All of our product lines are up this year. Demand is very strong overall if there's material available.”

The impact of distribution sales through September especially was strong in LDPE and PP, where that market essentially accounted for all domestic growth of those materials. Total nine-month domestic sales for both LDPE and PP were up less than 1 percent, but without distribution sales growth, each of those markets would have seen slightly negative sales results, down less than 1 percent.

At Chase Plastic Services in Clarkston, Mich., sales of engineering resins, as well as concentrates and additives, are up by double digits both in dollars and in pounds sold, according to President Kevin Chase. He credited a strong U.S. auto market — with builds on track to surpass 17 million in 2014 — for helping his firm show such positive results.

“There's a lot of pent-up demand in automotive, and here in the U.S. we're finally making a dent in unemployment, which has helped,” Kevin Chase said.

Prime resin distribution to large customers is up 19 percent at Osterman & Co. in Cheshire, Conn., while sales in less-than-truckload amounts are up more than 50 percent, president John Dwyer said.

“We've seen growth, but even with our prime partners it's all about supply, supply, supply,” he added. “We've been lucky with our partners, so we've been able to grow.”

Dwyer cited food packaging and caps and closures as the two largest growth sectors for his firm through August.

(Muehlstein, Thornton and Osterman all are headquartered within about 60 miles of each other. There must be something in Connecticut's water supply that makes resin distribution seem like an attractive business.)

At PolyOne, distribution Vice President Mark Crist cited packaging as a reason for distribution sales growth. PolyOne's distribution unit doesn't do much work in that market, however, generating more sales from the transportation and health care markets. Both of those sectors also are having good years in 2014, he said.

“We have sellers dedicated to these segments,” Crist explained. “It's specialization of supplier training. We're doing more than just providing material.

“In medical, we're challenging our health care customers to optimize their processes. And in automotive, we hope people keep buying cars, because that helps all of us in the economy.”

Challenges of 2014

In 2014, sourcing material — especially PE — has been a challenge at times, as unplanned outages have kept supplies tight. But overall economic strength — with U.S. GDP expected to grow 2.2 percent for full-year in 2014 after growing 1.9 percent in 2013 — is giving fuel to distributors' optimism.

The impact of affordable shale gas also is huge, since it's allowing billions of pounds of PE capacity — and smaller amounts of PP and PVC — to be added in the next four years. PET capacity is growing as well, but for non-shale reasons.

“Producers are looking to us to find a home for that new [PE] capacity,” Ed Holland said. “Every [resin] company is looking to see how [distribution] can take a bigger amount.

“But the U.S. is a big market. If the market is 40 billion pounds and it grows 1 or 2 percent, you need a new reactor. I think it's going to be similar to the expansion we saw in the Middle East a few years ago — where it was spread out far enough to avoid disaster,” he said.

Holland added that he believes the new PE capacity will reduce volatility in the market, but won't produce the drastically lower prices that some are expecting. “We won't see a 30 or 40 cent drop,” he said.

Some drop in PE price, however, could help the overall market, according to Jake Thornton.

“Prices overall are too high domestically,” he said. “You can't push price to a guy making plastic ware and competing vs. China. It's the same with cups and bags. Some small guys can't commit to buying more than a bulk truck at a time.

“We're more bullish on polyethylene and polypropylene, but high prices are causing some buyers to take the minimum [order] and say they'll shop for the rest. A lot of buyers are buying 10 cars [of resin] and saying they'll find five in the spot market,” Thornton said.

“The economy is growing at a slow pace — but it's growing,” added Skoczen at Muehlstein. “Our biggest challenge has been the consolidation of larger processors buying mid-to-small processors. We've had several accounts get bought out and start buying direct from producers instead of staying with distribution.

“There are probably five or six best in class, very large converters buying up good regional businesses. That's a pretty big headwind that has all of us [distributors] looking for new accounts.”

But the new capacity is going to be a big deal when it arrives between 2015 and 2018. It could increase North American PE capacity by 30 percent or more and lead to smaller capacity increases for PP and PVC. One market veteran said that the region's resin makers understand that they'll need strong distribution partners to handle all the new capacity.

“Producers have come to realize that it's going to be difficult to export all the new capacity they're building,” said the source, who declined to be identified. “And they'll need to sell a fair amount to the North American market.

“Some producers that are building new capacity think they'll be able to export it all — that they'll get 3 to 5 percent growth all from export. But they'll need to sell some of it here. So they'll have to give more product to their distribution partners,” the source said.

At M. Holland, Ed Holland said he can see the new capacity causing both of those outcomes to happen. “There will be more [PE] exports, because U.S. producers have an advantaged cost position relative to everyone else in the world except the Middle East,” he said. “But we'll also probably see a major reinvestment in new capacity for finished goods.”

Ravago Holdings Americas, a Ravago unit, like Muehlstein, started to prepare for the new polyolefin capacity in late 2013 when it formed Genesis Polymers, a new business channel for bulk commodity plastic sales to North American processors. Skoczen said that Genesis “is doing well” in its first year of operation, with a good deal of sales into film and larger, volume-oriented markets.

Recent projects

True to their entrepreneurial roots, distributors haven't stood still in 2014. Market activity so far has included:

• Osterman hiring nine new sales reps, bringing its total of reps hired in the last four years to 20. All Osterman reps completed the firm's training program, which includes market-specific training.

• Thornton hired industry veterans Josh Prieve and Todd Maples. Prieve has 13 years of market experience and will serve as the firm's sales director. Maples previously worked for Nova Chemicals Corp. and will serve as Thornton's prime polyolefins director. The firm also recently hired William Zeronsa as chief financial officer and has added several business development managers as well.

• Holland has increased the size of its sales force to boost sales of nylon, polycarbonate, ABS and other engineering resins and alloys. The firm also has made improvements to its internal operating systems in order to make the firm more efficient and effective.

• Chase invested $1 million on renovating half of its 28,000-square-foot headquarters in Clarkston. The firm also has been chosen as the premiere U.S. automotive, consumer and industrial distributor of Sarlink and Teknar thermoplastic elastomers made by Teknor Apex Co.

• Nexeo Solutions LLC of The Woodlands, Texas, in late 2013 expanded its European distribution by adding antibacterial polymers made by Parx Plastics.

Deals disappear

Somewhat surprisingly, mergers and acquisitions have largely been missing from the regional distribution market so far in 2014. There have only been a few deals of note, two involving Nexeo. In early 2014, the firm paid $125 million for Archway Sales Inc., a St. Louis-based chemicals distributor that also distributes some specialty plastic resins and plastic additives.

Then in June, Nexeo sold its composites distribution business to Composites One of Arlington Heights, Ill., for an undisclosed price. Nexeo lost $250 to $300 million in annual sales with that move, but was estimated to have gained $200 million when buying Archway.

Early this month, distributor Curbell Plastics Inc. made its second acquisition in less than two years, buying distributor O&P Enterprises Inc. for an undisclosed price.

At this point in 2013, the North American distribution sector was wrapping up a two-year period in which seven businesses changed hands. Ravago was involved in five of those deals, including the purchases of regional distributors Amco Plastic Materials Inc. and A-Top Polymers Inc. M. Holland and Schulman each also made distribution-related deals.

Executives said part of the reason for the slowdown was there are fewer firms like Amco and A-Top remaining — family businesses that had distinct geographic focuses.

“We're open and looking for acquisitions,” said Dwyer at Osterman. “But there are fewer companies out there, and some of the ones that are left are smaller and limited or might be more reliant on off-grade sales.”

“Some [distributors] are poised to buy,” added Jake Thornton. “But there's still a lot of instability. This might not be the best time to be investing in other companies.”

At Muehlstein Skoczen said that the firm “is continuing to look for companies to bolt on, but it's harder to find those type of companies.

“A big organization also might have a lot of sales people, and it can be tough to integrate all those people after making a deal,” he added.

Line cards

Regarding line cards, some distributors are OK with the supplier mix that they have, while others are eager to add. PolyOne's Crist said that a distributor needs to consider what it can gain from adding suppliers before signing on new ones.

“If my line card is full, I have to ask what an addition can give us,” he said. “You've got to either get a different material supply or add strength in a geographic presence somewhere.”

Thornton said his firm would like to grow in engineering resins and might be looking at adding another domestic supplier, either there or in another product category. At Osterman, Dwyer said the firm expects to announce the addition of two new suppliers — one in commodity resins and one in engineering resins — by the end of January. Osterman also expects to add a new supplier in Latin America during 2015.

Full speed ahead

Most firms contacted for this story were focused on finishing strong in 2014 and were optimistic about 2015. For its fiscal year ended Sept. 30, M. Holland's sales volume in pounds “was up significantly — high single-digits to low double-digits,” Ed Holland said.

Kevin Chase at Chase Plastics said that his firm's 2014 sales projections were “right on budget,” even if its profit margins “have taken a hit.” He added that export-related sales had “a bright future” at Chase.

At PolyOne, Crist said that 2014 sales growth should finish “in the mid-single-digits,” with similar results expected for 2015. Sales at Thornton are expected finish 2014 with growth of 20 percent, Jake Thornton said.

Muehlstein's Skoczen summed up the dichotomy of having tight PE supplies at a time when so many capacity additions have been announced.

“We expect the market to remain tight,” he said. “Everyone's waiting for the big tsunami.”