Tough Times Ahead for Engineering Plastics Makers

23 September 2002 00:00  [Source: ICB Americas]

Times are challenging for Western Europe's engineering plastics makers. Demand in their major markets is depressed. To maintain revenue and open up opportunities in new segments, they are being forced to rely more and more on their flair for innovation.

In addition, the introduction of European Union (EU) legislation for the recycling of automobiles and electrical and electronics (E&E) equipment is already impacting manufacturers' choice of polymers.

The slump in sales has spread from the telecommunications sector and related information technology markets, which were the first to decline last year. E&E product sales followed in the wake of sluggish consumer demand. Last year, Europe's automobile market, the largest outlet for many engineering plastics producers, offered some consolation as it continued to expand while its US counterpart contracted.

However, the reverse is happening this year. While car sales have recovered in the US, they are tumbling in Europe. New automobile registrations in Western Europe slipped to their lowest level in several years. In August, they were 7 percent below their total during the same month last year. From January to August 2002, registrations fell by 4 percent.

In the first eight months of this year, the sales of Volkswagen, the European market leader, declined by 7 percent, while those of General Motors and Fiat, ranked number four and number five, fell by 15 percent and 20 percent, respectively.

Lower demand in Europe's main technical polymers markets was partly reflected in the half-year results of its engineering plastic producers, led by Celanese's Ticona and Bayer.

Ticona's sales decreased by 4 percent in the first half, however, its earnings before interest, tax, depreciation and amortization (EBITDA) increased by around one-third. Between the first and second quarters, the EBITDA margin improved from 4 percent to 11 percent.

Sales by Bayer's plastics business group went down by 12 percent, while the sales margin of its polymers division dropped to 4 percent, compared to 7 percent a year ago.

Rhodia's polyamide division reported a 13 percent drop in sales in the first half, with EBITDA going down 7.5 percent.

Engineering plastics producers are not only struggling with the effects of weak sales in some key European sectors. They are also confronted with the looming threat of manufacturers altering their polymer specifications because of EU legislation on the end-of-life recycling of vehicles. Similar regulations have been approved at the EU level for E&E products as well.

The new recycling laws, which within five years will oblige auto manufacturers to be responsible for the disposal of all vehicles they make, should mainly affect suppliers of high-volume engineering plastics. Already, producers are facing pricing and other competitive pressures from the increased commoditization of their materials.

"It's a double blow for some polymer producers," says one plastics consultant. "In addition to the slowdown in sales, they are already finding that some manufacturers are changing their buying policies with regard to polymers.

"Probably the olefin-based engineering plastics are the best positioned to benefit from this new legislation," he explains. "The most vulnerable are perhaps the styrenics such as acrylonitrile-butadiene-styrene and polyamide which can be expensive to recycle."

Also, as a result of the legislation, automobile and E&E manufacturers want modifications in the use of polymer additives. This means that plastics products have to be reformulated.

"These new regulations are going to have a major effect on a whole range of materials and chemicals," says Tom Chatterley, head of materials engineering at the Motor Industry Research Association, Coventry, England. "The legislation stipulates, for example, that lead as stabilizers must not exceed 10 kilograms per vehicle."

Manufacturers are also looking ahead to when there will be large quantities of recycled polymers, which they will want to reuse because their low cost.

"Carmakers have begun to put recycled plastics in their vehicles since it helps them gain experience with materials of which there will be a growing supply," says Andrew Simmons, chief executive of Recoup, Peterborough, England, an industry-backed advisory organization on plastics recycling.

"We will probably see more polypropylene being used in both automobiles and E&E products because it is easy to recycle," he adds. "Also, in its recycled form, it is already been shown to perform as well as virgin material in some components.

"The increased use of recycled plastic in cars is going to have an effect on the prices of engineering polymers. While prices may go down, the use of plastics in cars will go on growing because of the need for low weight and overall improved performance."

Unlike in many other EU countries, vehicle recycling legislation is already in force in Germany, and that country's plastics industry association has set up joint research projects for the recycling of engineering polymers.

One of these includes a plan for the chemical recycling of polyacetals, which are one of Ticona's major high-volume products.

However, Ticona does not expect to be greatly affected by the EU's new recycling regulations because of the large proportion of low-volume, high-margin plastics in its portfolio.

"We are working closely with the OEMs to meet their recycling needs," says a Ticona official. "But we don't expect that the EU legislation will have much of an effect on demand for our plastics, because in terms of volume they make up a tiny proportion of the manufacturer's final product."

With 53 percent of its sales in the global automotive market, Ticona has been making a significant effort to maintain its sales in the car sector through innovation. The company is focusing on developing products with properties such as high temperature resistance, low odor emissions for interior applications and low processing costs.

Ticona has also been trying to expand in these markets. They currently make up a relatively low proportion of total company sales.

One of the sectors targeted for growth is the medical segment, which presently accounts for around 3 percent of sales. Ticona sees a potential for higher sales of inhalers for asthma sufferers, surgical equipment and pharmaceutical packaging

At an analysts' meeting in London earlier this month, Stefan Sommer, Ticona's president, said that, by end of this year, he expects medical sales in Europe to rise at a annual rate of 20 percent.

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