Adhesives and sealants sector: prices up, consolidation continues

17 October 2005 00:01  [Source: ICB Americas]

Although some observers project that the adhesives and sealants market will be turning itself around after a period of decline, the sector is currently suffering like the rest of the chemical industry from rising feedstock and energy costs.

In the last few months, price increases have been announced by many adhesives and sealants producers. Companies like Dow, Forbo Adhesives, BASF, Huber Engineered Materials, Sartomer, Degussa, Celanese, Loparex, and Rohm and Haas have all said basically the same thing: price increases are needed to cover continued increases in raw material and energy costs.

“The petroleum-based raw materials required to produce our company’s products, as well as energy, transportation and other supplier costs have continued to rise,” says Bill Pringle, Sika Corp.’s industry division’s senior vice president. “We believe these cost increases will persist throughout the remainder of the year and will see further pressures as supplies are stretched to meet the demand resulting from the recovery of this summer’s devastating storms. This has left us with no option but to increase prices.” Sika is increasing some of its products by up to 12 percent.

The unfavorable currency exchange has also “squeezed margins drastically,” says Rasik H. Raythatha, business manager, calcium carbonate, PVC and barium strontium specialties for Solvay Chemicals Inc.

He adds, however, that in the next six to nine months, “rebuilding activities in the Gulf Coast should lead to an upsurge in demand for the construction materials such as sealants and adhesives, which is an important market sector for our calcium carbonate products.”

Even though the majority of Solvay’s activities were not directly impacted by the hurricanes, Raythatha says the impact on general economy “is also reflected by marginal slowdown in our business.”

Hurricanes Rita and Katrina’s indirect impact stretches across the Atlantic. “Raw material supplies have not been disrupted, but pricing and energy costs in England are as discouraging as they are here,” says Jeff Neidinger, Solvay’s business manager for caprolactones. Neidinger says the company continues to seek ways to remove costs from the supply chain.

Additional industry pressure is coming from China. With new production capacities in China and India seeking markets in the US and Western Europe, Raythatha says that Solvay has been operating under competitive pressure “for quite some time.”

“Entire customer bases,” especially furniture and textiles, “have migrated to Southeast Asia,” says Lawrence D. Sloane, president of the Bethesda, Md.-based Adhesive and Sealant Council Inc. “Couple this with the dizzying pace of China’s economy and it becomes clear that companies that want to achieve true organic growth must go where the customers are. More and more companies are playing in the international arena, yet must compete with the realities of low-cost regional foreign companies, which have a leg up on their US counterparts due to significantly lower wage rates and the absence of many regulatory and other overhead costs that American firms must bear.” Sloane speculates that India may be the next low-cost overseas locations where the industry might be heading.

Extreme competition is influencing acquisitions, says Daniel Murad, president and CEO of the Cincinnati, Ohio-based consultancy The ChemQuest Group Inc. “Growth challenges encourage companies to look for acquisitions as a means of advancing their position in technologies and markets.” The demographics of US adhesive and sealant manufacturers “are rapidly evolving to a two-class structure,” he says. “There is an order of magnitude in disparity … between the handful of large manufacturers with revenues typically exceeding $700 million and [roughly] 300 smaller manufacturers with sales typically below $50 million.” He says that smaller manufacturers lack the critical mass to sustain their competitiveness, and “face elimination unless they redesign their structure and offerings to provide differentiated products and services.”

In 2003, according to the Rauch Guide to the US Adhesives and Sealants Industry, published earlier this year by the Manchester Center, Vt.-based Impact Marketing Consultants Inc. (IMC), the top five US adhesives and sealants suppliers were Henkel, with $770 million in sales, National Starch ($575 million), H.?B. Fuller ($525 million), 3M ($310 million) and Bostik Findley ($285 million). In 2004, Henkel increased its market share when it purchased Sovereign Specialty Chemicals, which had 2003 sales of $225 million. This summer Henkel was busy again, acquiring Rhodia’s cartridge sealants business in August, after buying 49 percent of Polybit Industries, the United Arab Emirates-based construction sealants business. In July, Sartomer Company Inc. bought Goodyear Tire & Rubber’s Wingtack adhesive resins business. “Despite major acquisitions in recent years,” says IMC, “the business is not very concentrated.”

The size of the US adhesives and sealants market in 2004, says IMC, was estimated at 18.4 million pounds, with sales of $11.45 billion. By 2008, adhesives and sealants consumption will increase to $12.32 billion in sales. Total global consumption of adhesives and sealants in 2003 is estimated by the firm at 32.12 million pounds, worth $29.5 billion.

The US adhesives industry is considered fundamentally mature, says Murad, because 74 percent of it is performing at or below GDP growth. But the remaining 26 percent will be the engine for future growth, he says, with pressure-sensitive adhesives accounting for about 17 percent of adhesive demand based on volume over the next five years, and structural adhesives accounting for 9 percent of demand.

While the general adhesives industry will continue to grow at 3 percent per year, says Murad, “these categories will gain share against their conventional counterparts. It is anticipated that pressure-sensitive adhesives and structural adhesives will eventually make up 30 percent of the total adhesives market. More importantly, these categories also represent a more profitable mix of products to adhesive manufacturers.”

FORECAST US CONSUMPTION OF ADHESIVES & SEALANTS, MILLIONS OF $

End use	2003	2008(E)	growth %
Dental & medical	$57	$70	4.2%
Industrial assembly	$680	$820	3.8%
Electrical & electronic	$180	$220	3.1%
Packaging	$4,130	$4,650	2.4%
Transportation	$865	$960	2.1%
Construction	$1,850	$2,050	2.1%
Wood and related products	$2,290	$2,520	2%
Consumer	$460	$510	2%
Miscellaneous	$490	$516	2.5%
Total:	$11,002	$12,316	2.3%
Source: Impact Marketing Consultants

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