Market growing, but compounders say customers remain 'cautious'

Everywhere they've looked, North American compounders and concentrate makers have seen numbers on the rise in 2014.

Compounders in the United States and Canada increased their purchases of commodity resins by 16 percent in the first nine months of the year, according to the American Chemistry Council. That total included compounders buying 41 percent more PVC, 11 percent more high density polyethylene and 9 percent more polypropylene.

Numbers also were on the rise for leading compounder A. Schulman Inc. The Fairlawn, Ohio-based firm reported 15 percent growth for its fiscal year ended Aug. 31. That included a 12 percent gain in the Americas. Schulman's fiscal 2014 profit also more than doubled to $57 million.

“Reshoring is the biggest opportunity we see in the U.S.,” Schulman Chief Operating Officer Bernard Rzepka said in a recent interview in Fairlawn.

“Our U.S. sales are projected to double in the next five years,” added Rzepka, who will become the firm's president and CEO on Jan. 1 when Joseph Gingo retires.

Fellow compounding kingpin PolyOne Corp. of Avon Lake, Ohio, reported more modest sales growth of 4 percent for the first nine months of 2014. Included in that total is an 8 percent sales gain in its performance products and solutions unit, which includes PVC compounds.

“We've had a good, solid year globally,” said John Van Hulle, president of PolyOne's global color, additives and inks unit. “Transportation and health care have been especially strong.”

The unit's sales were up more than 1 percent through September, with operating profit climbing almost 17 percent.

Executives at other non-public compounders and concentrate makers had similar growth stories to tell. RheTech Inc. of Whitmore Lake, Mich., reported the most high-flying growth number, with business development vice president Jim Preston saying that sales are up 15 percent so far in 2014.

“A lot of [the growth] has been in automotive,” Preston said. “But the recession forced us to more work outside of automotive, and that business has been coming back too.”

RheTech's product mix includes compounds based on PP and engineering resins. Non-auto work for the firm has included toys and consumer goods such as totes and cutting boards.

Sales for 2014 also are up by double-digits at Calumet City, Ill.-based Plastics Color Corp.,

according to business development vice president Tim Workman.

“We've focused on higher-end, value-added materials, like those that go into medical devices,” he said. “Packaging in general remains our largest single market. In consumer packaging we've been able to take market share from other suppliers.”

More modest growth rates are expected at compounders/concentrate makers Penn Color Corp. in Doylestown, Pa., Ampacet Corp. in Tarrytown, N.Y., and Techmer PM in Clinton, Tenn. Penn Color's 2014 sales are on track to be up 5 to 6 percent, according to market development director Robert Kaminski. That rate isn't quite what the firm had forecasted, Kaminski said, but the firm's sales still are up in packaging, and sales into building and construction “are starting to see a little growth.”

Ampacet's North American sales growth in pounds should finish 2014 at 2 to 3 percent, said Robert Fielding, the company's senior vice president and general manager for North America. He described that rate as “a little bit above expectations, given the economy and uncertainty.”

“Flexible and rigid packaging did reasonably well,” Fielding added. “Those areas are a little insulated from economy. People still eat and buy things like shampoo.”

Techmer is on pace to be 3 to 5 percent ahead in sales by the end of the year, President Ryan Howley said. Sales at the firm's engineered materials unit could be up as much as 30 to 40 percent.

“There were some hiccups in the first half because of the long winter,” Howley said. “We got a late start in agriculture and in household, toys and outdoor, but it's picked up.”

Executives at compounders Asahi Kasei Plastics North America in Fowlerville, Mich., and Teknor Apex Co. in Pawtucket, R.I., declined to cite growth numbers, but each said their sales are ahead of last year's pace.

“Auto is leading it,” Asahi Kasei President John Moyer said of his firm's growth. “All of our customer base seems to be growing. Lightweighting is creating opportunities in auto. It's giving compounders an advantage to grow ahead of the curve.”

“Our sales are strong and up to our expectations,” Teknor President William Murray said. “Automotive continues to be very good around the world. Our business in nylon and [thermoplastic vulcanizates] is growing by double-digits into auto.

“We feel that our polymer-neutral approach is working,” he said. “PVC, TPV, styrenics, nylon — we can go with whatever the correct solution is.”

The big economic picture

In a broader sense, North American compounders are benefiting from some macro-trends. U.S. GDP growth is on track to be around 3 percent, North American auto builds are expected to reach 17 million and U.S. housing starts are expected to approach 1 million for full-year 2014.

These rising tides are lifting many boats.

“We had a good first half,” said Craig Nikrant, president of specialty engineered materials at PolyOne. “Health care is a market we've chosen to focus on, and it's up double digits thanks to applications like transparent catheters.”

PolyOne's Gravitech-brand compounds also are being used for lead replacement in dental cabinets and similar applications. Nikrant added that composites made by the Glasforms business that PolyOne acquired in 2013 are “really exciting” in 2014. They're being used in ballistic panels in protection applications and at shooting ranges, as well as in the auto market.

After many years of building a strong presence in packaging, Fielding said that Ampacet is trying to expand in new markets, such as non-automotive injection molding. Outside of automotive, Moyer said that Asahi Kasei's sales into furniture and into the pool and spa market “are picking up.”

RheTech has reduced automotive's share of its business from 90 percent five years ago to its current total of 70 to 75 percent. But Preston said the firm in 2014 still has done “a lot of under-hood, under-dash work, including some composite and metal replacement.”

Hello to good buys

The pace of merger and acquisition activity remained strong in the North American compounding market in 2014. Schulman continued its buying spree, buying Prime Colorants of Franklin, Tenn., and the specialty plastics business of Mayfield Heights, Ohio-based Ferro Corp. The firm now has made 10 acquisitions in less than five years. Citadel Plastics made its eighth deal in seven years, buying Composites Group of Highland Heights, Ohio.

PolyOne — another rabid acquirer of recent years — hasn't made a deal so far in 2014. Other deals have included Washington Penn Plastics Co.'s purchase of the specialty polypropylene compounding business of ExxonMobil Chemical Co., and Breen Color Concentrates being purchased by private equity firm Capital Partners.

Teknor Apex also bought PVC compounder Viking Polymers of Jamestown, N.C. Murray said that Teknor's integration of Viking “is going as planned.”

“PVC alloys allow us to offer a value play to our customers,” he added. “They give us a greater presence in the building products area and more exposure to the residential side.”

Even Ampacet — which typically expands by building new plants — got into the acquisitions game by buying Australian concentrates maker Allied Color & Additives. Fielding said that the integration of Allied “is going better than expected” and that the firm is “a great addition.”

“Before going to the M&A market, you need to know where you're growing and where you need to grow,” said Rzepka, who's been involved in many of Schulman's deals. “We had to understand our strengths and weaknesses.”

“We use the same integration process every time,” he added. “It's always challenging, so you have to be very disciplined. It can take two to three years to fully integrate a company.”

Techmer last made an acquisition in 2013 when it bought TP Composites, but Howley said his firm “is always looking for deals that make sense and are a good cultural fit.” Kaminski added that Penn Color “would like to make an acquisition in 2015, either in color or a complementary area.”

PCC is looking to expand both in North America and beyond, according to Workman. The firm recently increased capacity at its plant in Asheboro, N.C., and early next year will decide whether to expand in Calumet City or to find another location in the area. Adding a location in Brazil also is on the table for PCC.

“If you look at North America, it's a pretty mature market,” Workman said. “We've run to the point where we have to grow outside of internal opportunities. The question is whether we do that in North America or someplace else.

“We'll have our customers lead us to where they want us to be,” he added. “That's a much better way than forcing a plant into a geography.”

Adding on, building up

Outside of the M&A world, several compounders have expanded the old-fashioned way: By building new buildings or installing new machines.

Asahi Kasei in September broke ground in Athens, Ala., on a compounding plant that Moyer said will open in early 2016. The firm already is considering adding an additional location in Mexico as early as 2018, he added. It has operated a sales office in Toluca since 2008.

Murray confirmed that Teknor recently added a second TPV line and increased its lab capabilities at its plant in Leominster, Mass. The firm also will add a TPE line at its plant in Oldbury, England, by the end of 2015 and plans to add a new PVC compounding line in Singapore as well.

Ampacet recently added new twin-screw extrusion lines at its plants in Heath, Ohio, and Querétaro, Mexico. Penn Color also is undertaking a sizable expansion at its plant in Hatfield, Pa.

In Whitmore Lake, Mich., RheTech will add 7,200 square feet of space for manufacturing and raw material storage by mid-2015, Preston said. That project will include a new twin-screw extrusion line, bringing the firm's total number of lines to seven.

Italian compounder So.F.Ter Group also recently opened its first U.S. compounding plant in Lebanon, Tenn. And Washington, Pa.-based Audia Group — owner of Washington Penn Plastic Co., a major polypropylene compounder also based in Washington; and Uniform Color Co., a color concentrates maker in Holland, Mich. — announced that it would spend more than $50 million to build a major plastic materials plant in Noble, Ga. That plant is set to open in the second half of 2015.

Making the (new) grades

New products remain the lifeblood of any materials firm, including compounders and concentrate makers. Nikrant said that PolyOne has seen success with its new Versaflex-brand TPE compounds with Percept additives, which can serve as an anti-counterfeiting measure in wearable electronics.

Ampacet plans to launch new flame retardant concentrates by mid-2015, according to Fielding. Howley said that new products for Techmer will include polyolefin-based antistatic compounds for electrical devices.

PolyOne also is working to move its antimicrobial materials beyond health care and into products like containers for well water storage, Van Hulle said. Other antimicrobial applications include lab wear and other “clean, hygienic functions,” he added.

Penn Color has worked this year to commercialize its Pennacle-O brand opaque PET compounds, according to Kaminski. Teknor's Terraloy-brand materials have low VOC rates and can meet green building codes, Murray said.

For PCC, new Mibatch materials use anti-counterfeiting technology to function as “chemical markers,” Workman said, protecting supply chain integrity and “making sure the right stuff goes into the end product.”

Customers on edge

But underneath all of this activity, several compounding executives contacted for this story said there's still an undercurrent of uncertainty among their customer base. Explanations for that feeling vary, with some admitting they're not sure where it's coming from.

“In general, the mood [among customers] isn't positive at any stretch,” said Kaminski at Penn Color. “They thought the economy would be farther along than it is now.”

“I still think customers are cautious,” Teknor's Murray added. “They're not booming by any stretch of the imagination. [The recession of 2008] wasn't that long ago. They remember it distinctly.”

He also said that Teknor's customers “are very careful in terms of hiring people — they're more likely to invest in equipment.”

Asahi Kasei's customers are growing and are looking to add people, but Moyer said they're having a hard time finding workers to fill entry-level positions. Fielding described Ampacet's customers as being “cautiously optimistic” as they watch their investments and focus on just-in-time inventories and smaller purchase orders.

For RheTech, Preston said customers “are thinking about capacity expansions, but they're gun-shy.” PolyOne's Van Hulle added that “if you talk to customers, they seem to be cautious in general, but they're more optimistic about their individual fortunes. That's because there's global uncertainty in politics.”

A parting glance

The ups and downs of the compounding life can be seen by recent conditions at Techmer. The firm has been challenged to find machine operators and other direct labor, Howley said. It's also been puzzled by customers such as one who went from buying container loads of the firm's compounds every two months to buying smaller amount of 2 to 4 tons every week and a half — even though doing so created higher logistics and overall costs.

On a more positive note, Techmer reduced waste sent to landfills from its Tennessee plant by 50 percent in 2013 and by another 25 percent so far in 2014. The firm also found a creative solution to a land issue there. Howley said Techmer did not want the land behind its plant to be developed, so it bought the 11 acres and renamed it Techmer Woods, an area for employees that includes a quarter-mile walking trail, picnic tables and exercise stations.

“I wanted to look at ways to use it, yet keep it as green space,” Howley wrote in an email. “I spoke with some employees to get an idea of what they were interested in doing at work for enjoyment, and many of them just wanted ?a place to take a walk and/or eat lunch outside on a nice day.

“Once you're in the woods, you feel more like you're in a national park,” he added. “And a million miles away from any industrial site.”