Adhesives & Sealants Getting Squeezed

18 October 2004 00:01  [Source: ICB Americas]

Despite fragmentation, increased raw material costs, and displacement to Asia, the adhesive and sealants market continues to present opportunities for profit.

According to JPMorgan, improved economic growth is increasing demand in the global adhesives and sealants market. However, the opportunity is fragmented into as many as 60 end markets, the largest of which are packaging, construction, tapes, transportation and consumer applications.

North America consumed 2.8 million metric tons of adhesives in 2002. Polymer dispersion/emulsion adhesives satisfied a healthy 48 percent of that demand, with hot-melt taking another 21 percent, and solvent-based adhesives, 15 percent. Reactive adhesives held about 7 percent of the North American market, followed by water-soluble polymers (4.9 percent) and natural polymers (3.7 percent).

In terms of volume, the global ad-hesives and sealants industry is currently expanding at a rate of 4 to 5 percent, says JPMorgan. Industry prices have been flat to down, while raw material costs have risen, leading to gross-margin compression.

Globally, the adhesives and sealants market is worth $28.4 billion, with North America, Western Europe and Japan accounting for $19.6 billion.

Among major players, Avery Den-nison experienced 15 percent growth in PSAs (pressure-sensitive adhesives) in the second quarter of 2004, says JPMorgan.

Eastman’s CASPI (coatings, adhe-sives, specialty, polymers and inks) business grew 7.9 percent during the same period, and Rohm and Haas Company saw 9.4 percent sales growth in adhesives and sealants. For the third quarter, HB Fuller grew 8.7 percent year-over-year in global adhesives.

The industry is in the midst of widespread consolidation, with several important mergers and acquisitions occurring in only the last few months.

In October, for example, Düssel-dorf, Germany-based Henkel KGaA signed an agreement to acquire Chi-cago-based Sovereign Specialty Che-micals Inc. for roughly $575 mil-lion. Henkel, considered to be the global leader in adhesives and sealants, has also applied for antitrust approval to buy Richmond, Mo.-based Orbseal, a $62 million adhesives and sealants manufacturer specializing in the automotive market. Early in 2004, Henkel bought the Korean sealant manufacturer Lucky Silicone Industry Co. Last year, Henkel acquired three businesses: Collano’s hot-melt adhesives for nonwoven dispersibles in Switzerland; the Makroflex adhe-sives plants in Fin-land and Estonia; and the adhesives and sealants operation of Desc in Mexico.

While Henkel’s European retail and professional adhesivesbusiness has been called “rock solid” by some observers, and is projected to continue doing well, Henkel’s US adhesives acquisitions have potential risks, say some analysts, due to rising raw material costs.

Cytec’s October purchase of UCB’s surface specialties unit (see “Industrial Specialties,” pg. 14) is another major move that essentially doubles the company’s size. UCB bought So-lutia’s resins, additives and adhesives busi-ness last year in a $500 million deal that in-cluded the Vianova holdings that Solutia had spent $640 million to acquire three years earlier.

Sovereign is a similar child of mergers and acquisitions. Founded in 1995 to buy businesses in the adhesives, sealants and coatings industries, the company has grown through about 10 acquisitions to become the largest privately held adhesives maker in the US, with sales for 2003 of $391 million. Sovereign supplies three markets: industrial; packaging, paper converting and graphics; and construction.

Other recent moves include Switzer-land-based Sika’s acquisition of Wack-er’s sealants and curtain-wall bonding business, including its Elastosil and Ventotec ranges, in 2003. Germany-based Kömmerling Chemische Fab-rik acquired the glass sealants and casting resin business from Chemetall the same year.

The context of these developments is a dramatic geographic shift: adhesives consumption in developing regions of the world is rising at nearly three times the rate in the US and Western Europe, according to Kusumgar, Nerlfi and Growney Inc. (KNG). Consumption in developing regions totaled $5.7 billion in 2002, says the North Caldwell, N.J.-based consultancy, which identifies Asia, excluding Japan, as the largest developing region with adhesives consumption of $3.5 billion.

Latin America consumed $1.3 bil-lion of adhesives in 2002, with Brazil and Mexico the largest users. Although growth in many Latin American countries has suffered of late because of faltering economies, KNG says demand is beginning to pick up. Eastern Europe was a $600 million outlet for adhesives in 2002, and strong growth is projected as more countries enter the European Union. Africa and the Middle East consumed $300 million worth of adhesives.

One response to the changing situation is to move production closer to these growth markets. In December 2003, Degussa AG announcing that it would build a colorants plant and a manufacturing facility for producing coating polyesters in Shanghai, China.

The company faces considerable competition from China’s 1,800 adhe-sives makers. According to the China National Coatings Industry Asso-ciation, China’s combined output of adhesives and sealants rose by 10.7 percent to 2.89 million metric tons in 2002. Acrylic emulsions jumped by 33.3 percent, hot-melt pressure sen-sitive types by 34.6 percent and sili-cone varieties increased by 55.2 per-cent. Phil Phillips, president of South-ern Pines, N.C.-based Chemark Con-sulting Group attributes China’s extreme growth not only to that nation’s cheap labor force, but also its modernized factories, which enable Chinese manufacturers to produce adhesives much more efficiently than more antiquated factories in the US.

However, in China, too, there is con-siderable pressure to consolidate: In 2002, about 200 adhesives manufacturers either closed or merged.

The situation is less critical in other emerging markets. Market information firm DPNA International Inc. says that domestic reforms in Latin America should encourage foreign investment; the Middle East, despite ongoing conflicts is still open to exports and has an “evolving” adhesives market; and now that South Africa has a moderate political atmosphere, there are “very good prospects” there for growth.

By contrast, the market is mature in the industrialized regions. Japan consumed $1.5 billion of adhesives, but growth there is placed at a 1 percent annual rate. Japan’s adhesives industry continues a downward trend, with output falling by 5.5 percent to 1.05 million metric tons in 2001 and again by 0.9 percent to 1.04 million metric tons in 2002.

In Western Europe most markets are mature and suffering from economic downturn. Feica, the association of European adhesives manufacturers, expects an overall growth rate no higher than 2.5 percent over the next five to ten years. Meanwhile Europe’s largest market—Germany, with a 25 percent share—is stuck in a slump. Its construction and furniture industries represent particularly weak spots, resulting in a drop in the demand for building adhesives and sealants by 5 percent during the first three months of 2003 compared to 2002 and by 20 percent compared to 1999. The German furniture industry shrunk by 12 percent and furniture adhesives suffered for it.

However, exports to Eastern Eu-rope have offered a welcome export opportunity to adhesives producers in Germany. In 2002, German adhesives exports rose by 15 percent to €658 million and growth has continued into 2003. Poland, for instance, imported 53,450 metric tons of ready-made ad-hesives in 2002, and Germany, at $45.2 million, supplied nearly half of the demand. Eastern Europe’s brisk demand for polyurethane adhesives is also largely filled by Germany.

Adhesives suppliers continue to be squeezed by rising raw materials prices—especially in the more commoditized sectors. Suppliers say that the basic chemical suppliers have been so pressured for such a long time that the have no recourse but to push those increases onto the customers. While customers have expressed a measure of sympathy, they also must keep in-creasing prices to maintain at least some margins, pushing the cycle on.

In September, Rohm and Haas in-itiated several price increases in its adhesives business in an effort to offset rising raw material and transportation costs. Prices for converting adhesives were increased in Africa, Europe, the Mideast and North America by 8 to 10 percent. Also, prices for all adhesives sold to the pressure-sensitive, construction, and caulks and sealants sectors were increased by 8 to 10 percent as well, says the company.

The company says it has been raising prices since the end of the first quarter 2004 in an effort to offset rising raw material costs, particularly propylene, styrene, and natural gas. Rohm and Haas has raised prices for acrylic polymers across most of its product lines, including adhesives and sealants, consumer and industrial specialties, paints and coatings, and plastic additives.

The price hikes have helped improve profits, but have not completely offset rising raw material costs as expected, the company says.

Adhesives prices have risen by 5 to 10 percent in the past year, and prices for resins and other ingredients have risen by at least 10 percent since December 2003, suppliers say.

Also in May, National Adhesives, a unit of National Starch and Che-mical Company, increased the price of all its pressure-sensitive adhesives by 5 to 7 percent.

For architectural and industrial coatings and the adhesives and sealants industries, Dow had an April increase of 3.5 cents per wet pound for acrylic, vinyl acrylic, styrene acrylic, SB and NeoCar polymers. “These price increases are based on dramatic increases in styrene costs, which are being driven by benzene,” says a company representative.

On the other hand, R&D continues apace. This August, Rohm and Haas was selected by the US Department of Energy to receive a $2 million grant to develop adhesives and sealants derived from soya beans and other renewable materials. Over the next two years Rohm and Haas will carry out a research program to use sugars, soya bean oil, castor oil and other biomass resources in place of traditional petrochemical-based materials. BASF, with a global €280 million adhesives business, opened a €5 million coatings center for contact adhesives.

The US adhesives market is projected to see more than $11 billion in sales for 2004, according to ChemQuest Group, a Cincinnati, Ohio-based consultancy. In 1999, the US adhesives industry had sales of about $9.5 billion, which leaped to more than $10.5 billion in 2000, but with the economic downturn, sales dropped to around $9.7 billion in 2001.

Meanwhile, there are virtually no price increases being passed along to the huge chains such as Wal-Mart and Home Depot. Those merchants tend to have so much clout that they can “push back” and even demand greater cost reductions.

A future driver, however, may be the conversion of mechanical fasteners to structural adhesives. The potential would be well over $60 billion, says Chemark.

According to the New York City-based business intelligence gatherer MarketResearch, the global adhesives and sealants market was 45.4 million metric tons in 2003, an increase of 3.1 percent from 2002. Consumption in North America grew by 2.3 percent to 2.9 million metric tons. Western Europe’s market grew by 2.1 percent to 2.6 million metric tons in 2003.

“There really aren’t any market leaders due to the industry’s extremely fragmented nature,” says Chemark’s Mr. Phillips.

Meanwhile, end-users have changed purchasing patterns in response to increased environmental regulations worldwide, says JPMorgan, moving from solvent-based technologies to water-based. Water-based technologies make up 58 percent of the global market value, against hot-melt (with 20 percent) and solvent-based, which is now down to 9 percent of purchases.

An increase in ultraviolet, electron-beam and visible-light (UV/EB/VL) technology is growing as end-users discover superior bonding properties. UV/EB/VL technologies, which use radiation for curing adhesives, permit instant polymerization without the use of water, heat or solvents. Additionally, these technologies, which are nonpolluting, are attractive in the face of greater environmental regulations. In 2002, says JPMorgan, the value of the radcure (radiation curing) adhesives market was $254 million, 41 percent ($105 million) from North America, 30 percent from Western Europe ($77 million), and 28 percent from Japan ($72 million).

Meeting greater environmental standards can be somewhat problematic, with product prices tending to be higher because the technology is new. Furthermore, says JPMorgan, customer resistance to new products and increased initial pricing may result in higher costs. However, demand for “greener” adhesives is rising.

Out of the almost 11 million metric tons of adhesives consumed globally in 2002, 3 percent was based on natural polymers, 3 percent on water-soluble polymers, 14 percent was solvent-based, and 11 percent was hot-melt. Reactive adhesives accounted for another 32 percent, polymer dispersion/emulsion adhesives for 35 percent and other systems for the remaining 2 percent.

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