Resin market has consolidated as it matured

The classic quantity vs. quality debate has played out in the ranks of North American resin makers in the last 25 years.

That's the comparison created by the dwindling number of resin makers plying their trade in North America in 2014, as compared to the number that were doing the same when Plastics News went to press for the first time in 1989. The effects of this consolidation on processors and on the plastics industry in general are still being debated. And industry veterans have no shortage of opinions on the subject.

The consolidation of the North American polyethylene market was spotlighted by veteran consultant Nick Vafiadis at the recent Global Plastics Summit in Chicago. At the event, he went through a series of screens showing the number of players in the regional PE field declining from 26 in 1995 to 20 in 2004 and to 16 today.

As the number of PE players shrunk, the region's PE production capacity actually grew, placing more resin into the hands of fewer firms. The market's economics and the reality of its profit margins also gave an advantage to those producers who were back-integrated into feedstocks, said Vafiadis, who's with IHS Chemical in Houston.

The 34 billion pound PE market of 1995 had grown to almost 45 billion pounds by 2014. The capacity held by the average producer also jumped from 1.3 billion pounds to more than 2.6 billion pounds.

Has this movement helped or hurt processors? Chris Bezaire, vice president of PE for materials maker Nova Chemicals in Calgary, Alberta, thinks that it's helped.

“In an industry that had as many players as ours did in the past, it's natural that some consolidation occurs,” Bezaire said in an email. “This has increased the amount of technology development that's occurred over the years as development was combined and led to new products and technology benefiting the converters and end users.”

One longtime PE seller in the southeast U.S. said that there's “a direct correlation” between the reduction in the number of producers and the improved quality of material.

“Since there are fewer suppliers, they can make longer [production] runs and reduce the number of grades they're making, so there's less transition of material,” the buyer said.

“In the old days, you'd have 2 to 3 percent of a run end up as wide-spec,” he added. “Now that number is only 0.2 percent or 0.3 percent.”

A veteran PVC buyer from the southwest U.S. said that resin quality in that market also has improved, as the number of producers has shrunk from a remarkable 20 in 1989 to roughly six today.

“Companies now are making really good quality [PVC] resin,” he said. “You used to see companies try to cut corners in production to save some money, but now that's gone.”

The number of players in the PP market has increased over 25 years as more players entered the field. PET market players have continued in the six to eight range, but the number of North American polystyrene suppliers has dipped from seven to only three in the last decade alone.

The other major concern of course is that a smaller supplier total gives processors fewer places to look for more competitive resin prices. One veteran PE buyer in the southwest U.S. thinks processors already are at a disadvantage in this regard.

“There's no real leadership [among suppliers], so the big polyethylene companies can raise prices at the drop of a hat,” he said. “Some might have a moderate view on pricing, but they'll raise also. Consolidation has been an awful thing for processors.”

Consequences of consolidation

PE market consolidation also may have hurt processors by requiring suppliers to focus on making only certain types of material, market analyst Mike Burns said. That's placed a lot of pricing power in the hands of the three or four remaining PE makers that still have broad product portfolios, added Burns, who's with Resin Technology Inc. in Fort Worth, Texas.

“In some cases, if you're blow molding, there might be only three suppliers approved for the product you're making,” he said.

North American PE makers that use low-cost, natural gas-based feedstocks “have become expert at calculating just how far their pricing power can go” before foreign PE makers using higher-cost, crude oil-based feedstocks can economically deliver resin to North American processors, according to Phil Karig, managing director of the Mathelin Bay Associates LLC consulting firm in St. Louis.

This in turn has caused processors to become more sophisticated.

“Processors can't just sit back and expect a multitude of local resin suppliers to beat their way to their doors to make competitive offers as might have been the case in the past,” Karig said in an email.

“At a minimum, processors should have an understanding of foreign resin availability and foreign supplier cost structures … in order to be able to weigh the pros and cons of importing resin,” he added. “Even if they never actually import resin, [they need] to be able to demonstrate to domestic suppliers that they are knowledgeable enough to periodically use foreign buying opportunities to expand their supplier base … beyond what the smaller local slate of suppliers would allow them.”

Others in the market disputed whether market consolidation has given makers of PE and other resins an economic edge. “There are still 10 domestic producers, giving the North American market diverse supply choices,” Nova's Bezaire said.

“The number of producers hasn't shrunk to the point where there's an oligarchy of pricing power,” said market veteran Craig Blizzard at Chevy Chase, Md.-based Blizzard Consulting Group. “That's because of offshore sources and because of a lot of material leaving the region as exports.

“There's never a shortage of material,” added Blizzard, who spent more than 30 years with PE/PP maker LyondellBasell Industries and its predecessor firms. “And the remaining suppliers have the scale they need to deliver materials economically.”

The southeastern PE seller said there are still multiple options for PE buyers in most product categories.

“There are always a few [producers] that try to lead,” he said. “Some are true participants and can lead markets. Some pretend to be in the business and just follow. But, overall, consolidation hasn't been terrible for the market.”

“Some resin companies can be happy as followers, even if they're not the ones setting the price,” added Burns at RTI.

Distribution challenges

Resin market consolidation also has created challenges for resin distributors in the region, according to Ed Holland, president of M. Holland Co., a leading distributor based in Northbrook, Ill.

“The lack of off-grade resin has eliminated some companies in the secondary market,” said Ed Holland, who recalled that in the mid-1970s there were 14 polystyrene producers in North America.

“It used to be that if a resin company needed 24 cars [of resin], they made 36,” he added. “Now, they have to make 24. Up until 2000, producers would run flat out and drive costs down on a per-pound basis. Now they make more money even if they're not running close to 100 percent.”

Consolidation also has had the effect of requiring distributors to invest in more technical service and support, since there are fewer resin firms around to do so.

“In 1976, we had one guy who was technically astute because he had been a molder,” Holland recalled. “Now we've got 12 or 14 [technical] people and two labs, as well as a molding machine and a film extruder.”

Branded distribution — such as that offered by M. Holland — also has become much more important as the number of resin makers was reduced, he added.

“Resin companies' logistics and services can't do everything anymore,” Ed Holland said. “They've got bigger and bigger customers. Now, a larger percentage of their total customers and a larger percentage of their market share is going to distribution.”

In addition to concentrated pricing power, consolidation has negatively affected processors in more subtle ways, according to Karig. One such impact has come from the elimination of price protection, which often guaranteed resin pricing for more than 30 days.

“With a smaller number of producers, it's become easier for producers to push initiatives that are more quickly adopted by their competitors, to the detriment of processors,” Karig said. “The classic example of this is how extended price protection from price increases has been drastically curtailed in recent years.

“Today, it's much less common for processors to have 60 or 90 days or more of protection from price increases as many processors did in the past,” he said.

Consolidation also has had an outsized impact on some resins more than others. Karig cited PS and ABS among resins most affected.

“Both [PS and ABS] are down to just a few key North American suppliers,” he said. “Despite multiple rounds of capacity reductions in resin and sometimes feedstocks, both of these markets have been continuously buffeted by competition from competing resins, as well as from high and volatile raw materials costs that eat into their margins.”

Into the future

So what might the future hold? Or at least the next 25 years? Has resin market consolidation run its course? Or will new capacity resulting from shale gas draw more entrants to the market?

“Over the past few years, there have been a significant amount of new capacity announcements, some from existing players and some from new entrants,” said Bezaire at Nova. “We can't say which of these projects will ultimately move forward, and whether the new entrants will enter the market, but as of now it does appear that there will be some new players late in the decade.

“More consolidation is likely inevitable,” he added. “But we can't say how or when it could happen.”

“We might see a couple of new players in PE,” consultant Blizzard said. “If companies have new crackers, they'll want to use that ethane on site. But it's hard to imagine an explosion of new suppliers in polypropylene. There's some suspicion that not all of the PDH propylene expansions that have been announced will come onstream.”

The southeastern seller countered that if profits start to flag from their current high levels, consolidation may continue.

“We might see a couple of suppliers flushed out in PE in the next few years, and maybe in PP as well,” he said.

At IHS, Vafiadis expects the number of North American PE players to expand slightly to 18 by 2019, as new entrants take advantage of the region's shale gas economics.

Those raw materials will play a big role in determining if we've seen the last wave of consolidation — or if more is on the way, according to Karig.

“As long as the price of natural gas in North America remains a fraction of what it costs in most other major resin producing areas of the world, there will be incentives to build new PE capacity here,” he said. “The big questions for current and prospective PE producers will be at what point will the North American PE market become saturated … and even if the market can continue to grow locally and through exports, how much capital are they willing to commit to these multi-year projects?”

Depending on how those questions are answered, some suppliers may build new resin plants on their own, Karig added, but others may seek to establish joint ventures to share the cost and reduce the number of suppliers at the same time.

“Beyond joint ventures, some may even seek to purchase their rivals in the PE business who may be further along the road to starting up new capacity, rather than starting from scratch themselves,” he said. “And outside investors, particularly private equity investors, may identify opportunities to buy and combine one or more PE makers who are currently independent.”

Whether or not new players enter the market, the realities of a maturing North American plastics market — as well as time restraints on executives working in that market — mean that some of the wilder aspects of buying and selling might be gone for good.

“Before, you could find a niche player offering a hot deal, even if you had to look in 10 or 15 places,” the southwestern PVC buyer said. “It was kind of fun, but now those are harder to find, and we've got limited time to devote to find deals.”