Compounders revel in strong 2016

Many North American compounders and concentrate makers have enjoyed a sweet 2016, saying that the year has matched or exceeded their expectations so far.

“We set aggressive targets and surpassed them,” said Ryan Howley, president of Techmer PM in Clinton, Tenn. “Our sales are on track to be up more than 5 percent.”

“We've had a good year, and it's probably been good for our competitors as well,” added William Murray, president of Teknor Apex Co. in Pawtucket, R.I. “Our North American sales were reasonably good, and raw materials were favorable for us.”

Sales of commodity resins to compounders in the U.S. and Canada were mixed in the first nine months of 2016. Compounders in that region bought more polypropylene and low density polyethylene in that time period, but lower amounts of high and linear low density PE, PVC and polystyrene, according to the American Chemistry Council. The PP total includes sales to compounders in Mexico.

“The sluggish economy in Europe and North America has presented challenges, but we've grown revenue by maintaining our focus on service, collaboration and specialty formulations,” said Craig Nikrant, Specialty Engineered Materials president with PolyOne Corp. in Avon Lake, Ohio.

“We've had a good year volume-wise, but our sales total has been impacted by lower prices for resins like polyethylene, polypropylene and nylon,” added Jean Sirois, Europe managing director with RTP Co. in Winona, Minn.

“I think any compounder would tell you they've had a good year,” said Mike Rosenthal, executive vice president of The Plastics Group of America in Woonsocket, R.I. “We're seeing growth of close to 10 percent in some product areas.”

Plastics News recently checked in with these and other executives to measure the health of the regional market for compounds and concentrates.

Several firms have spent 2016 digesting recent acquisitions. At Americhem Inc. in Cuyahoga Falls, Ohio, that meant integrating Vi-Chem Corp., a PVC and thermoplastic elastomer compounder that Americhem acquired in March.

“The big story for us this year was Vi-Chem,” Americhem President John Deignan said. “We've been busy the last six months with integration. The key was the additions of TPE and flexible PVC. That will allow us to add on to our automotive business.

“Acquisition is a constant part of our strategy,” added Deignan, whose firm now has made three deals since 2012. “We're always looking at strategic acquisitions for four reasons — technology, market entrance, a stronger position or geography.”

PolyOne has benefited from its July acquisition of composites makers Polystrand and Gordon Composites, according to Nikrant.

“We're confident that composites are one of the fastest growing materials technologies today, and that with this acquisition, we can be at the forefront from a materials science and formulation perspective,” he said.

RTP's 2015 purchases of Alloy Polymers and Polymer Partners LLC moved the firm into larger volume markets, Sirois said. Integration of both of those firms is going well, he added, and RTP is open to new acquisitions.

Teknor's March acquisition of German compounder PTS GmbH “has solidified [Teknor's] position with technology that we now can take to other parts of the world,” Murray said.

Techmer has made three acquisitions in the last decade — most recently buying compounder TP Composites in 2013 — and continues to look for “opportunistic deals,” according to Howley. “The No. 1 thing for acquisitions is the cultures of the two companies and how they mesh,” he said. “That can be hard to evaluate.”

Penn Color Inc. of Doylestown, Pa., is looking to be active in the M&A market in 2017.

“We searched hard for a domestic acquisition in 2016, and had fairly in depth conversations with several companies, but just haven't found the right fit yet,” market development director Bob Kaminski said.

“We'll continue to search for the right acquisition to complement our product offerings in 2017,” he added. “But it's more likely that we'll pull the trigger on an acquisition outside the U.S., perhaps as early as mid-2017.”

But the overall number of compounding deals appears to be shrinking, according to Phil Karig, managing director with the Mathelin Bay Associates LLC consulting firm in St. Louis. “There's almost unlimited capital available for acquisitions, but compounding companies, especially smaller ones, haven't attracted as much interest as other plastics processors recently,” he said.

Karig explained that this slowdown is due in part to financial problems that some compounders had when resin prices dropped faster than recycled feedstocks, and the gap between recycled and virgin compounds narrowed sharply. He added that the market still has too many compounders that rely on commodity resins and commodity products that don't generate the solid EBITDA margins that attract financial buyers such as private equity companies.

But at the same time, Karig pointed out that “there are bargains to be had,” especially among smaller compounders where the prospective buyer has the marketing or technical expertise to expand the compounder's market reach and upgrade its product offerings.

If North American compounding execs are worried about the slow pace of U.S. GDP growth — which is expected to be 2 to 2.5 percent this year and in the near future — they're not showing it.

“It's really been a slow growth market globally since 2010,” said Joseph Gingo, CEO of A. Schulman Inc. in Fairlawn, Ohio. “Demographics have played a role. Europe, Japan and the U.S. have slow growth in part because of the age of their populations.

“That's why we're reinvesting in new opportunities in Turkey and China,” he added. “We'll invest selectively in the U.S. and Europe, mainly to improve equipment and operating efficiencies. Those are slower growth markets.”

Karig said that, from a macro-perspective the U.S. has been in a slow growth environment since 2008-2009.

“For the first few years after the Great Recession, plastics processors and their compound suppliers played catch-up to make up for demand destruction in 2008-2009,” he said. “And almost everyone has benefited from growth rates above GDP since then.”

Going forward, Karig added, the question will be what happens when major markets such as automotive and construction start to get “a little long in the tooth.

“The answer is that those compounders that have cost advantages or unique proprietary products, or both, will fare better than those who specialize in products such as commodity black masterbatch,” he said. “And those with defendable positions in higher growth markets such as packaging or medical will also be better able to withstand the pressures of a slowing economy.”

At Penn Color, Kaminski said that 2 percent U.S. economic growth “doesn't concern us that much.

“It's been hovering around that number for several years now, but we've been fortunate enough to see growth rates that are two to four times larger than that,” he added. “A large part of our business model has always been to find solutions to problems, or to use technology to improve the value of other products on the market. When you can do that, there will always be customers that support those efforts, making us less reliant on the overall strength of the economy.”

The automotive market remains an important one for many American compounders. That sector has come roaring back from recession levels, but U.S. auto builds for 2016 are expected to be flat with 2015 levels of around 17.5 million.

“Our budget for 2016 is that sales will be up 7 to 7.5 percent,” said John Moyer, North American president of Asahi Kasei Plastics North America, a compounder that generates more than 90 percent of its sales from the auto market. Moyer added that Fowlerville, Mich.-based Asahi Kasei is “a little worried going forward.

“Automotive seems to be slowing, but I'm not sure if it's flattening,” he added. “Financing becomes an issue. I think most people who could get auto loans already did.”

Iichiro Kitsuda, the firm's sales and marketing executive vice president, said that U.S. auto builds may plateau at close to 18 million before beginning a downward trend.

Americhem's deal for Vi-Chem has expanded its auto offerings, according to global supply chain director Rod Manfull. “We now can offer materials for hard trim, soft-touch trim and fiber components,” he said. “No other compounder can offer those three.”

“Automotive is interesting, as there continues to be a gradual shift in the centers of gravity from Detroit, Stuttgart and Tokyo to China,” said John Van Hulle, president of color, additives and inks for PolyOne. He added that his firm has a number of facilities in China and South East Asia that can meet automotive demand.

PolyOne's Nikrant added that although automotive growth has slowed, the firm continues to see interest in lighter weight, structural solutions from customers. “Their goal is range extension, getting the most mileage for the least amount of energy input, without compromising a vehicle's structural integrity,” he said.

In these areas, PolyOne can provide customers with high strength-to-weight ratio materials, including continuous fiber advanced composites as well as long fiber materials, Nikrant added.

At Mathelin Bay, Karig said that the key thing to watch in the auto market is the continuing shift from passenger cars to more light vehicles such as pickups. “Passenger car sales may slow, but the increasing sales of light trucks will offset some of any lost compound sales for cars,” he added.

Gingo said that Schulman expects the auto market to be steady in 2017, but he pointed out how much expectations have changed over the years. “We used to love a 15 million build number,” he said.

The auto slowdown might be in the future — but for now, Asahi Kasei's newly opened plant in Alabama is running seven days a week, with two extrusion lines in operation and a third due to start up later this year or in early 2017. The firm also expects to have a production site in Mexico operating by 2018, Moyer said. Mexico currently accounts for 15 percent of the firm's North American sales, Kitsuda added.

The packaging end market also is creating opportunities for compounders in 2016.

“The packaging market has been very steady,” said Gingo at Schulman. “People always need to eat, and that means they'll need packaging for food,”

“Packaging has been a great market for us over the years, and we don't anticipate that changing in 2017,” Penn Color's Kaminski said. “With the huge range of manufacturing processes and all the different polymers and colors and effects that are desired in the packaging industry, it gives us many opportunities to innovate and create value.”

But the packaging market also has seen some recent changes, according to Van Hulle at PolyOne. “There's a decline in carbonated soft drinks,” he said. “Brands are shifting to juices, coffee drinks, dairy and other non-carbonated options.”

PolyOne has “the broadest portfolio capable of meeting the needs of this market,” Van Hulle added, with barrier additives for visible and UV light as well as oxygen, and color options in both solid and liquid.

North American compounders are firing on all cylinders in many other 2016 end markets as well. Techmer has seen a rebound in its agricultural sector from products such as greenhouse and mulch films, Howley said, while the firm's medical engineering compounds are growing because of new business in gowns, drapes and medical devices.

Teknor Apex is seeing an improvement in sales into building and construction. “It was kind of in the doldrums for about five years, but now you see a lot of cranes on the skyline in Boston,” Murray said. “There's work in office buildings and in residential and commercial, and that's increasing demand for our wire and cable materials.”

RTP is enjoying growth across the board, Sirois said, but especially in “top-end engineering resin applications” that need high-heat performance or lightweighting in auto or electronics.

At PolyOne's Performance Products & Solutions unit, wire and cable and building and construction were the top two growth markets this year, both in residential and industrial sectors, according to President Don Wiseman. The unit's strong performance there has supported growth in both existing and new applications, he added.

Top growth markets for Penn Color in 2016 have been rigid packaging, construction and automotive, both interior and exterior, Kaminski said. In total, the firm's 2016 sales should be up 6 to 8 percent vs. 2015.

Americhem also has been advancing on many fronts. The firm has had a good year in building and construction, Americas Commercial Vice President Matt Miklos said, and has expanded its cladding products into decking. In engineering resins, Miklos said that Americhem has seen “a lot of development activity” in high-temperature grades of polycarbonate, nylon and more advanced materials.

At Clariant, Snow said that new business has emerged in food packaging and fiber production. The firm's flame-retardant materials business “has taken off,” he added, with new demand in industrial packaging, construction and automotive.

“Flame retardants were a little slow to develop for us in the past,” Snow said. “But now non-halogenated grades seem to have found markets that have value.”

Clariant also is seeing growth in small to mid-size lots of compounds and concentrates based on engineering resins. Snow described these lots as ranging from 500 to 5,000 pounds.

“Previously, customers would have bought these amounts from resin producers, but now there's a void in the market,” he said. “We made some investments in some of our U.S. locations to make these sized lots and they've been selling out like hotcakes.”

The Plastics Group has seen new applications for its materials in recreational products, ranging from gun stocks to jet skis to snowmobiles, according to Rosenthal.

Karig said that recycled-content compounds are growing as well. “Whether it's for cost reasons or to promote ‘green' goals, we have seen across the board demand for recycled compounds from plastics processors,” he added. “Some of the demand has been driven by regulatory requirements such as the need for more post-consumer recycled content in the California market, but big box retailers such as Wal-Mart and Home Depot are continuing to push for more recycled content.”

Regional compounders have to be looking ahead while focusing on existing markets. That's where new products come in.

Nikrant said that 43 percent of PolyOne's sales come from formulations that were invented in the last five years. “This really underscores our ability to develop new solutions that overcome the challenges customers present to us,” he added. “It's made possible by the consistent and ongoing commitment to investment in R&D and innovation.”

In its color business, Van Hulle said that one of the areas PolyOne is focusing on is fiber coloration, using both liquid and solid masterbatches. Last year's acquisition of Magenta Master Fibers — a specialty color concentrates business owned by BASF SE — is part of the firm's strategy to focus on fiber colorant solutions and sustainability, he added.

For performance products — including PVC compounds — PolyOne is focused on flexible and rigid vinyl solutions for a connected world, Wiseman said. This includes internet of things-enabled home devices and appliances, LEDs, and electrical and wire and cable solutions for a range of end-use applications.

At Mathelin Bay, Karig said that it's critical for compounders to continue focusing on developing new products, especially because many processors are getting smarter when it comes to deconstructing the costs of commodity compounds.

“If a compound isn't particularly unique, and the volume that a particular customer buys is large enough, there's always the danger that the customer could move from buying a custom compound to having it tolled at a lower margin,” he said. “Or the customer could even backward integrate into making some compounds themselves.”

What wonders might 2017 hold for the North American compounding market?

Penn Color has been delayed in starting construction of its new Global Research Center in Hatfield, Pa., but Kaminski said that the firm is still very hopeful to break ground on the 30,000-square-foot expansion before winter sets in. The new building will give Penn Color room to add more applications equipment, physical and analytical testing equipment and a new design center.

Moyer said that for Asahi Kasei, growth might be “a little above GDP” in 2017, but that the firm likely would focus on new applications instead of volume growth.

Clariant will continue to invest in its 10 U.S. plants in 2017, as well as in its plant in Canada. Snow said he's seeing “a mixed picture” from the firm's customers, with some excited about growth and others “tightening their belts.”

But, overall, he said he's positive and upbeat about 2017. “I'm excited about our possibilities in some markets,” he said.

Karig at Mathelin Bay said that one of the big things for compounders to watch in 2017 is the impact of the flood of new PE capacity on compounders specializing in recycled products. “The gap between recycled and virgin PE compounds is likely to narrow sharply and stay there for the next several years,” he said.

“It also wouldn't be a surprise to see more interest in resin producers expanding their compound sales either internally or through acquisition to achieve more margin than they can on resin sales alone,” Karig added.

At PolyOne, Nikrant said that there are “abundant opportunities” for growth in its main technology focus areas, as well as in top growth markets such as health care, wire & cable and consumer. Van Hulle added that PolyOne “is looking for an improvement over this year, as our new technology and product launches gain traction with customers.”

The Plastics Group is considering the addition of a new production line in 2017, which would allow the firm to add a few employees as well, Rosenthal said.

Kaminski said that Penn Color should be able to achieve 6 to 8 percent sales growth again in 2017. “We have lots of products in the pipeline for 2017 and beyond,” he said. “And we have a strong current customer base.”