A tale of two industries for compounders at close of 2023

Like all great philosophers, compounding and concentrates executives are capable of holding two conflicting thoughts at the same time.

For example, as we head toward the end of 2023 this group is uncertain about 2024, while also debuting new products and adding jobs and machinery. Economic indicators are good, but orders for compounds and concentrates have slowed in recent months for most companies.

Among economic indicators, U.S. gross domestic product growth in the third quarter of 2023 was a red-hot 4.9 percent, although a lower rate is expected in the fourth quarter of the year. GDP growth for full-year 2022 was just over 2 percent, down from COVID-fueled growth of almost 6 percent in 2021.

The Dow Jones Industrial Average began 2023 near 33,100 but was near 35,200 in late trading Nov. 20 for a gain of almost 6 percent. The broader S&P 500 has showed stronger growth, starting the year around 3,800 but trading near 4,600 on Nov. 20 for a surge of just over 20 percent.

Higher interest rates have played a key role in 2023 by increasing the cost of borrowing for acquisitions or to buy new machinery. The federal funds interest rate began 2023 at a low of 4.25 percent before four hikes sent it to as high as 5.5 percent. The rate had been 0.25 percent at the start of 2022, before the Federal Reserve began a series of rate hikes designed to slow inflation.

Those moves have met that goal. Inflation peaked at 9.1 percent in June 2022 and has declined since then, reaching 3.2 percent in October 2023. Inflation had averaged around a 2 percent annual rate for most of the 2000s and 2010s.

Among publicly held materials firms, sales at Avient Corp.'s Compounds, Additives & Inks unit were down 14 percent to $486.5 million in the third quarter vs. the year-ago quarter with operating income down 6 percent to $64.5 million. The firm's Specialty Engineered Materials unit saw a third-quarter sales loss of 3.5 percent to $267.9 million, with operating income also down 3.5 percent to $30.3 million.

At the Advanced Polymer Solutions unit of LyondellBasell Industries, third quarter sales were down 14 percent to $899 million, with the unit showing an operating loss of $6 million. The unit had reported operating income of $2 million in the third quarter of 2022. Sales volume in pounds for the unit — which ranks as North America's largest compounding business — was down more than 2 percent in the third quarter to just over 800 million pounds.

Plastics News recently checked in with several executives and market watchers in the compounding and concentrates world to see what their mindsets were as 2023 draws to a close.

"It's been a mixed bag," said Lou Cappucci, executive vice president at Teknor Apex Co. in Pawtucket, R.I. "The UAW strike affected the automotive market and higher interest rates are holding back building and construction. Some markets have held up in pockets, but we need to settle in and see where real demand is.

"Some resins are long, so we need to manage inventory to supply demand," he added. "The question is whether the economy will pick up."

2023 has been "a very interesting year," according to Scott Anderson, president and chief operating officer at Polymer Resources Ltd. in Farmington, Conn. "It's been a good year, but 2021 and 2022 were outstanding. We're off of those growth rates, but we're still seeing significant growth."

Anderson added that his firm's customers "worked through inventory in the fourth quarter [of 2022] and first half of this year. We're just now seeing order levels return to normal."

"We're in a very volatile time," said Bill Ridenour, president of the Polymer Transaction Advisors consulting firm in Foxfire, N.C. "Some companies overbought [in 2022], and that affected their inventories. Now with inventory down, they might have to buy again in the fourth quarter [of 2023]."

Market veteran Keith Rodden said that the 2023 compounding and concentrates market is hard to explain. "It seems like polypropylene compounders are busy, but all of the others are not," said Rodden, owner of Compound Solutions LLC, a consulting firm in Gallatin, Tenn. "Inventory shouldn't still be a factor at this point."

The building and construction slowdown has affected firms such as Aurora Plastics of Streetsboro, Ohio.

"We're in a post-COVID cycle of demand and inventory levels, and there are some pretty challenging headwinds," CEO Darrell Hughes said. "Single-family housing is very sensitive to interest rates, but we saw some growth in the back half of the year."

U.S. government infrastructure spending has helped demand in some markets, and health care demand "has held up fairly well" in 2023, according to Jean Sirois, strategic planning managing director with RTP Co. in Winona, Minn. "We haven't hit a recession [in 2023] because of demand for services," he said. We're aspiring to 2019. COVID created a boom [in 2021 and 2022], but then reality came back."

ATC Plastics LLC in Indianapolis "has seen our customer base stay fairly busy this year," owner Tom Stevning said. For ATC, the pipe market "has been strong, with a mild spring and fall helping [pipe customers] maintain a longer season for installation," he added.

"After a few years of industrywide supply chain challenges, our vendors and customers have largely normalized their inventory positions and lead times," said John Richard, CEO at Americhem Inc. in Cuyahoga Falls, Ohio. "Challenges and opportunities still exist, so it's imperative that we work closely with all stakeholders in the supply chain to ensure our customers are taken care of."

2023 "has been a challenging market based on volume, with a lot of destocking," said Mike McHenry, CEO at Techmer PM in Clinton, Tenn. "But I think it's bottomed out."

"I think we were all in a drunken stupor in the second half of 2022," market veteran Mike Gaudio said. "No one saw the signals. Business started to taper off after August and September, but we were all in denial.

"All of our plants were running, so we thought that growth would come back," added Gaudio, global business and marketing vice president for Ampacet Corp. in Tarrytown, N.Y.

Overstocking "is in the rearview mirror" for the packaging market, according to Shruti Singhal, CEO with Chroma Color Corp. in McHenry, Ill. But he added that customers' buying behavior "is changing to smaller lot sizes and more frequent orders. They won't even make larger purchases with volume discounts. We don't see that going away soon."

It "has been a challenge" for Geon Performance Solutions of Westlake, Ohio, said Chief Commercial Officer Wendy Herbst. "We're staying close to our customers and focusing on the things we can control," she said. "We're building our product offerings, even in a down market."

Among individual markets, recreational vehicles, snowmobiles, jet skis and all-terrain vehicles have provided growth in 2023 for Plastics Group of America in Woonsocket, R.I., according to Executive Vice President Mike Rosenthal.

At Teknor Apex, the firm has seen "good results" from the wire and cable market. Food packaging and lawn and garden products have been good demand areas for Peacock Colors of Addison, Ill., according to CEO Andy Ubhi.

Richard at Americhem said that growth markets in both 2023 and 2024 include health care, fibers, building and construction, automotive, industrial and packaging. At Techmer, McHenry said the firm's compounds based on engineering resins are selling well into health care, medical devices and aerospace uses.

Geon is revamping its business structure and strategy, Herbst said, with a concentration on the building and construction, power and transportation markets. At OptiColor Inc. in Huntington Beach, Calif., the firm is seeing strong growth in colors for sheet used in military goggles and similar applications, according to President and CEO Jennifer Bryan.

Approvals for some major new projects could lead OptiColor to see growth of 35 percent in 2024, Bryan said.

"It feels like we spent two years recovering from the supply chain crisis, but now we're back to normal," she added.

Although electric vehicles are creating opportunities for some flame-retardant plastics, there are still some questions about how quickly that market will develop, said Rodden at Compound Solutions. The market for PVC compounds is recovering, according to Phil Karig, principal of the Mathelin Bay Associates consulting firm in St. Louis.

Karig added that packaging demand "has suffered a little bit" because of concerns about recyclability, but that potential shortages of carbon black and titanium dioxide additives "weren't as bad as expected" in 2023.

As in many parts of the plastics industry, interest in sustainable products remains high in the compounds and concentrates market.

Teknor Apex revived its Terraloy brand of sustainable materials earlier in the year.

"We're looking for ways to bring value to customers in the sustainability area," Cappucci said. "A lot of our customers are looking at sustainability in additives. It's just a question of which ones work in their products."

Previously, some compounders had used recycled material as "an affordable option," according to Rodden. But in the current market, that's not always the case, he added, since recycled materials can be more expensive than virgin resins.

PRL "always has had sustainable grades" with post-consumer and post-industrial recycled content, Anderson said. But now, customers are more interested and are looking to find repeatable sources of recycled content. PRL also is seeking Underwriters Laboratories approvals for some recycled materials.

Peacock has some liquid colorants that are based on natural vegetable oil, Ubhi said. At RTP, Sirois said that "stakeholders and policy makers want sustainability, but as resin prices come down, using recycled resins is a challenge."

In some case, Geon has done regrinding work for customers to allow them to reuse materials.

ATC "is very in tune with the sustainability concerns," Stevning said. "We offer products that support sustainability and at the same time maintain a high level of quality."

Chroma recently was honored for its sustainability work by the EcoVadis consulting firm. "Customers want sustainability, and it gives us a seat the table," Singhal said. "It's no longer just a box to check."

Economic uncertainty hasn't stopped compounders and concentrate makers from expanding their businesses. Plastics Group added 12,000 square feet of space in late 2022 and installed a new twin-screw extrusion line earlier this year. PRL just completed a major 60,000-square-foot expansion of its plant in Rochester, N.Y., which included a new twin-screw line.

Peacock is in the process of completing a move into a 55,000-square-foot site in Elgin, Ill., with two production lines expected to be in place by the end of January. Two new twin-screw lines also will be installed, with five to 10 jobs being added, Ubhi said. Chroma is moving some lines within its production network, Singhal said, and plans to add two or three new lines in 2024 after adding about five this year.

In early 2024, Aurora will complete a 20,000-square-foot expansion in Streetsboro. The expansion will include a new blending line, increasing the site's annual production capacity by 100 million pounds. The project also will create 30 new jobs.

OptiColor has big plans for 2024, as the firm looks to add a production and warehousing site in Ohio in order to be closer to some of its customers. The new site will have two production lines, Bryan said the firm plans to add another production line in Huntington Beach in 2024 as well.

Looking to 2024, the community of compounders and concentrates makers is optimistic — but they won't be making any bets with company money.

"It's a bit too volatile to make a commitment," PTA's Ridenour said when asked about prospects for 2024. "It could be a stronger market for compounds if resin prices are favorable."

"Things could be good, but we also could have a roller coaster," said Rosenthal at Plastics Group. Rodden at Compounding Solutions added that "there are so many mixed signals [for 2024]. … Compounders could still make money, but not in areas where they generally would look."

At PRL, Anderson is basing his optimism on a recent increase in orders and on seeing "a lot more action now in the engineering departments of our customers — they're looking at a lot more new projects."

"If you look at where the economy is going, there's a fair amount of softening," Mathelin Bay's Karig said. "Truck shipments and container rates are down, so a soft landing [for the economy] is possible."

"I think in the best case we see modest growth, but there's substantial risk of a real downside."

For Ampacet, Gaudio said that 2024 "should be a better year in North America, but it might not pick up until the second half." Chroma is basing its hopes for 2024 on customers' expectations of better results in the second half of the year, according to Singhal.

Herbst is more optimistic at Geon, expecting "great things" in 2024. "We've got a new strategic plan and are looking to execute in areas less affected by the economy," she said.