Supply, pricing issues subside, but now COVID-19 creates uncertainty

For businesses along the silicone market supply chain, the rapidly evolving industry has righted itself in capacity and demand, at least when compared to several years ago, when demand outran supply and both upstream producers and downstream customers witnessed volatile pricing.

Some of the supply problems in mid-2017 originated in Asia, considered the bellwether of the silicone market due to its ability to produce large amounts of the compound, because of regulatory shutdowns and slowdowns that lasted through 2018. This, in part, combined with other supply issues and the elastomer's rising demand across a myriad of markets, produced the imbalance.

But the apparent rebalancing of the market is in the context of a "normal" market, and current conditions are anything but normal. Many of the industries in which silicone is used — from automotive to commercial and military aviation, from medical to construction, from household goods to consumables — have been upended due to the coronavirus pandemic.

"The short answer is yes, things are pretty well balanced now," said Eric Bishop, marketing manager, North America, for Akron, Ohio-based Shin-Etsu Silicones of America Inc. "But this was prior to the coronavirus crisis. It is better than two years ago when there was a tightness of the supply chain and volatile pricing. This has pretty much resolved itself — not because demand has gone down but because capacity has increased."

While some in the industry say upstream capital investments and increased production efficiency has helped to free up capacity for the largest suppliers like Shin-Etsu, Momentive, Dow Inc., Wacker Chemie AG and Elkem Silicones Co., others have said capacity was never in doubt, especially in Asia. In some cases, according to industry professionals, the mere announcement of planned infrastructure improvements — without the capital investments ever coming to fruition — were intended only to boost the market for the short term.

Those on that side of the argument maintain that the crux of the problem was an imbalance in supply — when silicone was needed in North America, excess capacity in Europe was being shipped to Asia, where profitability was highest.

Major suppliers were unable to get silicone to the right people at the right time, and lead times for silicone and related products drastically increased.

"A lot of the constraints in Asia have been resolved, constraints that limited silicone monomer and silicon metal production," Bishop said. "Quite a few suppliers have engaged in capital investments to expand capacity, in both feedstocks as well as finished goods [silicone sheets or products themselves]."

He added that Shin-Etsu Silicones of America is in the process of building a plant to manufacture liquid silicone rubber in Akron.

Silicone is used in an incredible array of products, often selected for its wide temperature thresholds, chemical resistance, biocompatibility and low compression set, crucial for airtight gaskets and seals in harsh environments, such as aerospace and construction.

The compound is used in food contact and medical procedures, as it is highly inert and stable, according to Rey Obnamia, operating partner and vice president of San Clemente, Calif.-based IRP Medical Inc., a subsidiary of IRP Group.

"Silicones in general are the preferred choice for a lot of reasons," Obnamia said. "They can be specially formulated to enhance resistance properties, which makes it very suitable for applications like electrical and aerospace.

"For medical applications, LSR is the first material of choice due to its excellent compliance to regulatory requirements, such as biomedical grades, body fluids and blood contact, and for implantables."

In addition, Obnamia noted that LSRs often are used in high-volume component production, while high-cured rubber (HCR) silicones often are used in electrical and aerospace connectors and interfacial seals.

Scott Kearns, principal partner at Santa Fe Springs, Calif.-based ElastaPro Silicone Sheeting LLC, considered a mid-level mixing fabricator that deals exclusively in HCR products, has worked at all levels of the silicone industry. Previously, he was president and chief operating officer of R.D. Abbott Co. Inc. and before that an account manager with Dow Corning Corp. He even served as chairman of the Los Angeles Rubber Group.

"I think LSR will always outpace HCR in terms of market growth, but HCR will always be a staple in certain markets, with its primary use in configurations for gaskets, for vacuum blankets for composites, seals for defense and aerospace, and in health care. The big advantage of LSR is it enables mass production in a highly automated manner – lights-out production, if you will. HCR can be much more customizable, and perhaps most importantly it allows for a bigger toolbox of additives and modifiers to improve properties in one form or another."

J. Christopher York, Americas president of Elkem Silicones, noted that the market volume of HCR is higher than LSR, though LSR is growing at a faster rate.

All of these applications place silicone in either form, as well as its monomer feedstocks (polysiloxane and the metal silicon), in high demand across the globe.

Kearns said silicone has indeed rebounded in capacity, especially domestically, as the U.S. now can sustain itself, whereas several years ago excess supply had to come from either Europe or Asia to serve domestic customers.

"Yes, absolutely it has come back," Kearns said. "I would offer a slight modification, in that there has been some investment in Asia, but they have more than enough capacity. In North America, two years ago when there was a major shortage, prices were higher and this was more advantageous for Asia.

"Things have settled down quite a bit. Offshore suppliers are getting pinched, or in my view they will, as local domestic producers see capacity come back a bit. Domestic demand is now driven by domestic customers."

In the midst of the coronavirus pandemic, the silicone market, like many other global industries, remains uncertain, a fact that becomes more obvious by market segment, according to industry experts.

While demand in automotive and commercial aviation is down — driving available capacity up and the price down for silicone — defense, aerospace and construction remain strong. In addition, medical and health care silicone applications are way up.

"There are multiple segments, but within auto, where silicone has superior heat resistance for gaskets and seals, the industry is getting slaughtered right now and this has relieved demand," said Erick Sharp, president and CEO of Ravenna, Ohio-based Ace Products and Consulting LLC.

"Typically, we watch the Asian market, which seems to pace the industry globally, as Asia has the highest total monomer capacity. Europe has capacity and excess, and the U.S. capacity can somewhat service itself," Sharp said.

Sharp added that Europe is "kind of a lynch pin," in that when there exists high demand in Asia, there is high production in Europe. When the silicone market is tight in Asia, it trickles down to everyone else, as well. When demand is loose in Asia and China, the continent exports and prices drop.

Sharp said that's what's happening now, prices are dropping as Asian suppliers are exporting. A lot of that may be application-specific between HCR and LSR, and there may be some demand swings.

"HCR [in automotive] has taken a hit," he said, "but it's also used in construction, which is still going strong. On the LSR end, silicone is used in consumable goods and housewares, which may be down, but medical, with big dollar costs, is booming."

Sharp said his company, which does research and development in silicone, is seeing customers place projects and products on hold. "We are just in a wait-and-see position," he said. "It's going to be an interesting couple of months, as we are moving forward into a total unknown right now."

Elkem Silicones' York agreed that demand is in flux, as there have been decreases in certain segments such as automotive and aerospace driven by temporary shutdowns of manufacturing in these sectors.

"As a result, the market is currently in an oversupply situation, though we expect this to be [a] temporary situation," York said. "This can dramatically change again as we get to the other side of COVID-19. Prior to the coronavirus situation, supply had been approaching tight globally."

Obnamia said the pandemic has hit the industry hard in time-to-ship from several LSR manufacturers, placing the lead time for silicone and its raw materials between six and 12 weeks.

"It will be a while before we see a four-week lead time again," he said.

While over the past several years supply and pricing issues were caused by regulatory audits shutting plants in China, Wacker declaring force majeure at a facility and constantly rising demand for silicone, today the issue is COVID-19, according to Obnamia.

"We have increased demand from our medical OEM customers, especially for those in the respiratory segment and medical device wearables such as diabetes management," he said. "They have increased their projections due to the pandemic, increased safety stocks and assurance of supply."

Obnamia added that IRP Medical continues to see growth despite the pandemic's effects and that the firm will continue to fight the sickness "by practicing healthy and safe practices and to manufacture devices that save lives."

Shin-Etsu, which like IRP Medical and many others in the silicone industry has been deemed an essential business, also continues to operate at full capacity, Bishop said, supplying silicone rubber for medical devices and ventilators.

The global silicone producer has some employees operating remotely, and those who are coming to work are practicing social distancing guidelines and recommended health guidelines.

"Because of that, all operations are able to continue in full," Bishop said.

Kearns said PPE is in great demand due to the pandemic, a segment that fits well for silicone uses.

"Health care remains strong," the ElastaPro Silicone Sheeting partner said. "Commercial aviation has planes sitting on the tarmac, so the spare parts market is idle for the time being. It's going to take awhile for commercial aviation to catch back up, but they will catch up, and I do believe it's temporary.

"Overall it does seem like the silicone market is settling into some sense of normalcy. I don't anticipate 2020 having any real significant changes, and that it will be a stable market"

While silicone prices are not expected to get back to pre-2017 levels, which at their median point was about $2 per pound, according to Sharp, they are falling back to less volatile points than what the last several years produced.

Silicone prices exist in a free market, determined by the supplier and current market conditions, or "market realities and competitive realities," according to Bishop.

"Typically, pricing varies depending upon product, performance and uniqueness," York said. "For example, some upstream silicones are standards and pricing moves according to supply and demand. For other more specialized silicones, pricing relates to innovation development requirements, performance and value the silicone brings to the market."

The market is much less volatile now, Kearns said.

"I don't believe it will go back to pre-2017 levels, but it has stabilized," he said. "Some companies have other options and have looked to other channels, like fabricating with EPDM or a nonsynthetic elastomer. In our line as a silicone supplier, when the market was tight, people considered alternatives, no question."

York added that "application and performance targets drive technology selection."

For Obnamia and IRP Medical, silicone is the only option for its custom-molded products.

"We cannot just move away from one brand to another because in medical, the material brand and number is identified and highly regulated," he said. "We are mold-to-order, so we purchase depending on demand."

And Shin-Etsu's Bishop said silicone continues to take market share from other materials, with an exception being the cosmetic industry, which has been trending toward natural rather than synthetic products.

From February to March 2020, the price of silicone gum dropped 7 percent, Sharp said, and the cost has been trending down from its median peak point at around $3.50 per pound in 2018. Before the last couple of months and the coronavirus pandemic, prices had lowered to a median of about $2.50 per pound — still not back to normal, but trending accordingly.

Now China could be in a position to be aggressive again, Sharp said, depending on the market segment.

"With the COVID crisis, capacity of silicone monomers won't change; it's demand that will be the changing factor," he said. "If auto uses less, which it is now, or commercial planes are still not going anywhere, which they are not, producers may have to throttle plants back or find new opportunities in other markets or segments."

Globally, Sharp said, events leading up to the capacity shortages included a demand increase combined with catastrophic events such as the regulatory audits employed by the Chinese Ministry of Ecology and Environment and the resulting rolling shutdowns.

Other industry professionals say the capacity problem had earlier origins and have cited the closure of a GE plant in France, other capacity loss from European businesses and a strike at Momentive in Waterford, N.Y.

But all things that reduced supply — within a "normal" market — have been rectified, Sharp said.

In the short term, Chinese plants may have to throttle back to reduce supply.

"The Chinese operations are supporting Chinese fabrication, and the gap between supply and demand has leveled out," Sharp said.

And excess supply from Europe being routed toward Asia also has diminished, as Asian plants have plenty of capacity.

"Before, they couldn't keep up with demand, and the price of polysiloxane went through the roof," Sharp said. "Europe's excess capacity went to Asian customers. Now Asia has overcapacity, some of it COVID related, driving prices down."

And debottlenecking has been the primary factor in assisting capacity shortages, Sharp said.

"That's where we've seen capacity be able to pick up," he said. "But demand has taken a hit over the past couple months. There has been some movement in new infrastructure, with announcements that people are going to do something," citing Dow Corning's announced expansion in China.

"But with COVID and an unknown demand, I'm not surprised to see delays, putting some projects on pause or even canceled," Sharp said. "The last thing companies want to do is invest in something that's not needed, as that drives cost down."

York noted that Elkem Silicones is constantly looking to improve capacity for its customers, both upstream and downstream.

"As a fully integrated silicon to silicone material provider, Elkem is always looking at opportunities to support our growth strategy in silicones," York said. "Elkem has been investing and continues to invest in capacity expansions, optimizations and efficiency gains."

He added that the one constant in the silicone industry is change.

"There has been much change in the silicones industry over the last several years in terms of capacity consolidations, raw material availability issues and maintenance shutdowns," York said. "Meanwhile, usage of silicone materials has increased around the world, resulting in demand exceeding supply globally. Significant investments have been announced and are underway within the industry, including Elkem Silicones, which will help increase supply to the market."