US auto restructuring will shake up plastics suppliers

After the quake

08 June 2009 00:00  [Source: ICB]

US automotive plastics suppliers prepare for the aftermath of a massive industry restructuring. So what opportunities could this present?

US AUTO plastics suppliers are surveying the business landscape and finding themselves in a strange place.

The industry they depend on is going through a brisk bout of creative destruction. General Motors (GM) has declared bankruptcy and Chrysler is in the process of emerging from bankruptcy with new owners. Of Detroit's traditional Big Three automakers, only Ford Motor even faintly resembles a healthy company.

In the wake of a market where stagnation seems to be the new normal, demand for automotive plastics such as acrylonitrile-butadiene-styrene (ABS), polypropylene (PP) and polycarbonate (PC) has plunged, along with prices.

But if companies can make it past the current market quake - and that is a big if - they might see growth coming from a traditional foe of the auto industry: environmental activists and their drive for higher fuel efficiency.

"The buzzword right now in the industry is hibernation," says Jay Baron, CEO at US nonprofit organization Center for Automotive Research (CAR). "A lot of suppliers are wondering: Can we get through the next year at one heartbeat per month? The industry is getting smaller. There are a lot of suppliers that are going to go bankrupt before they get to enjoy the future benefits."

First, the bad news. The financial cracks that spread under the foundation of US automakers during the past few decades officially became a fully-fledged chasm this year.

GM, Ford and Chrysler have struggled as demand for their products plunged by 19%, or by 3m units, to 13.2m units in 2008. Sales at Chrysler, the smallest of the three, were down 55% for the year, according to information from US-based auto consultancy CSM Worldwide.

In April, Chrysler finally buckled, filing for bankruptcy and idling most of its plants for up to 60 days.

While that happens, automotive plastics suppliers - US-based Dow Chemical, UK-based INEOS, and Germany's Bayer and others - will be living hand to mouth and praying for things not to get worse.

The auto industry is an important chemical end market, with each vehicle containing an average of $2,200 (€1,582) worth of chemistry, according to the American Chemistry Council (ACC). Auto parts include rubber hoses, plastic dashboards, catalysts, fibers, adhesives and coatings.

But even after the company gets back on solid ground, US plastics suppliers could see a shift in the supply chain. This is because a group led by Italian automaker Fiat will acquire most of Chrysler's operations during the bankruptcy process.

A few US plastics suppliers expect the partnership to stabilize the market in the short term, although at least one analyst says it could also swing orders to European suppliers in the long run.

"The supply chain is going to shift," says Robert Eller, president of US-based plastics and rubber consultancy Robert Eller Associates. "It would represent the further input of European technology and polypropylene compounders into the North American supply chain. And it would continue the shift toward small cars in the North American market, particularly with the Fiat 500."

This would give European plastic majors such as SABIC Europe and Borealis more of a footprint in North American markets, Eller said.

But assuming that US auto plastics suppliers survive, they may see their fortunes improve.

Mike Jackson, director of North American Vehicle Forecasts at CSM Worldwide, says latent demand could drive US auto sales to 11m vehicles in 2010, up from a forecasted 9.7m in 2009. But manufacturers would have to drop sales and incentives to return to profitability.

"Going forward, there's going to be a recovery due to pent-up demand, but consumers are going to have to pay full price. The retail market has the potential to be much more profitable," he says. "If you look at the past 10-15 years, sales have been well above trend. But this trend was bought and paid for - the market was oversold by 8m units. We're paying for a correction. Lean companies will be leaner, but going forward there will be tremendous opportunity."

And that might mean new opportunities for plastics suppliers to have more say in a vehicle's design.

This is because automakers are facing an increasingly environmentally conscious government and buying base. In May, the Obama administration said it would advance the schedule for increased fuel efficiency for automobiles to require an average of 35.5 miles per gallon (mpg) (15.1 km/liter) by 2016.

As automakers look to increase fuel efficiency, many are expected to lighten their vehicles, making plastics or composite parts more attractive compared with steel.

"You're going to see more carbon fiber and more reinforced plastics," says Baron of CAR. "As cars get smaller, that means the amount of materials in a vehicle go down, and the variable costs between steel and plastics disappear."

At the Society of Plastics Engineers (SPE) meeting outside Detroit, US, in April, plastics suppliers were already showcasing plastic replacements for parts traditionally made out of metal.

"We have an administration in Washington that has a low-carbon economy as its agenda," DuPont Automotive engineer Patrick Granowicz told the audience at the SPE's Auto Epcon conference. "Fuel efficiency is going to be important. So what we can do now? Lightweight vehicles with plastics."

Substituting thermoplastic resins for aluminium on the V6 engine manifold of a GM 3800 sports utility vehicle (SUV) saved 2.6m bbl of oil between 1992 and 2006, Granowicz said.

An oil pan made of composite materials weighed up to 5kg, compared with 8kg for one made from metal, and raised passenger car fuel efficiency by 1%, he added.

Roman Lopez-Forment, director of engineering at US-based Woco Motor Acoustic Systems showed the audience the company's plastic muffler, saying it attracted interest from several original equipment manufacturers.

Lopez said using plastic would reduce a muffler's weight by 30%. That would give auto manufacturers the option to use current size standards and claiming fewer carbon dioxide emissions or increasing size for better horsepower.

"We all have a responsibility now for environmental consciousness," Lopez-Forment told the audience. "New solutions have to be found to reduce weight and increase fuel efficiency."

Even paint was not safe from plastic manufacturers' ambitions.

Bruce Mulholland, color technology manager of Ticona Engineering Polymers, a business of US-based chemical firm Celanese, tried to convince a room full of engineers that color-treated metallic plastic resins could replace most, if not all, metal chassis - although a highly-polished chrome look is still beyond resins' reach.

"There are two drivers for doing this," Mulholland said. "If you use a molded metallic material instead of paint, it's better for the environment and it lowers cost. If it's the monetary green that drives it, that's fine - the environmental green will follow."

Ben Lefebvre is markets editor with ICIS pricing. Based in Houston, Texas, US, he covers acrylonitrile-butadiene-styrene and polycarbonate, as well as the US biodiesel industry. He previously reported on immigration issues for the Sun-Times News Group.

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By: Ben Lefebvre
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