Plastics compounding market set for shake-up

Compounding confidence

16 June 2009 00:00  [Source: ICB]

The economic downturn has caused demand destruction, hitting plastic compounders hard and potentially leading to a shake-up of industry players

UNTIL THE global economy shapes up somewhat - when the rate of job losses hits bottom and industry's wheels begin to spin again - plastics compounders and converters will be facing tough times. And many expect significant restructuring in the industry, with few major players and fewer independent resin suppliers left in the aftermath.

But the biggest issue is surviving the fall-off in demand. This is especially the case in segments that have been traditionally strong users of engineering thermoplastics, such as electronics, building and construction and automotive, notes Nitin Apte, general manager, global marketing and technology, high-performance resins and LNP compounds for Pittsfield, Massachusetts, US-based SABIC Innovative Plastics (IP).

"Another challenge is that there is also some uncertainty relative to feedstock costs and supply-base consolidations," he says. "In the case of the latter, there's been a significant amount of product rationalization."

Industry sources say that demand is down by about 30% from where it was a year ago.

In January, Alexandre Dangis, the managing director of Brussels-based trade body European Plastics Converters (EuPC), made a plea for his constituents: "Converters are facing a crisis due to the downturn in the economy and the plight of downstream users such as automotive manufactures. It is essential that the EU and member states recognize the importance of this sector and assist European firms through this unprecedented economic uncertainty."

Late last year, EuPC called on compounders to increase pricing to offset higher raw material prices.

The demand for durable goods has been hit especially hard. These are generally expensive items that consumers feel can be "postponed" - they can wait and buy them later when economic circumstances pick up. And residential construction is estimated to be down by around 50% from where it was two years ago, says one compounder.

Long-term growth for compounded plastics in the North American Free

Trade Agreement region is expected to be 3-4%/year, "just slightly faster than GDP," says James Virosco, manager of special projects, strategy for market analyst Nexant ChemSystems of White Plains, New York, US.

The consultancy says demand has been weakest in the automotive and construction sectors, but strongest in packaging.

The flexible packaging industry has been growing, even in 2008, agrees Steve DeSpain, vice-president of sales and marketing for Kiefel Extrusion, based in Worms, Germany.

There has been good demand in the segments related to retail and consumer products, especially in the food sector. Since people can't give up basic necessities, "it comes to the point where it is a matter of a short or long-term investment for the customer," says DeSpain.

SABIC IP notes that the decline seems to have abated, with some strengthening in Asia, followed by the US, and a lagging Europe. Apte does see strength in health care, which he considers to be the strongest segment.

Cleveland, Ohio, US-based specialized polymer materials provider PolyOne agrees regarding health care, saying this segment has strong potential. Growth is being driven by several factors, including a longer-living population in industrialized nations and an expansion of health care availability in rural and poor areas. Meanwhile, a growing global middle class demanding quality medical care has created an added push.

"Materials will need to meet stringent standards, and materials companies will need to keep pace with the changing technology," says Michael Kahler, PolyOne's senior vice president of commercial development. Antimicrobial polymers that resist bacteria and fungus, and non-phthalate materials are some products that have potential in health care devices, he notes.

Confidence necessary
Confidence is the biggest issue that is required for recovery, points out DeSpain. The industrial sector needs to recover before investment can start again. "So it is more likely that business investments will recover before private investments" such as houses, cars, furniture or large electronics, he says.

Once that confidence is restored and consumption resumes, Apte is betting that the electrical/electronics segment will show the quickest recovery.

"This is the segment where consumers will start to buy first. Infrastructure spending should restart when credit loosens up and, following the inventory adjustments in 2008, electronics will return."

The transportation segment (not including automotive) should also see some rebound as the Boeing 787 Dreamliner aircraft is commercialized, and truck building restarts, notes SABIC IP.

Consumer confidence gains and housing starts should pick up in 2010, projects Kiefel, who feels the market is already starting to turn, albeit slowly.

"The customers we talk to all seem to be optimistic and most have told us they are getting busier," says DeSpain. "We are seeing an increase in quoting activity as well, so these signs point to better things ahead for all of us."

Green time
The current configuration of green products may not last in the long run. Perhaps they will be replaced by better products, or supplanted by a return of inexpensive plastics feedstocks. However, for the near-term, they certainly are a driver of compounded plastics demand.

Kiefel predicts that whatever the outcome for green end-products, they have influenced the creation of more energy-efficient equipment.

"Going green certainly has the power to cause a big market shift, but only if it doesn't add cost," asserts DeSpain. "Our experience is that in general, everyone wants to be green until it starts to add cost. There is a small group who will pay extra for green, but this is a select group."

But another facet of the green opportunity for plastics is the influx of government spending and private investment with the aim of developing alternative energy sources, points out Kahler.

"Whether or not you agree with the new administration's decision to implement a stimulus package, it does make funds available for programs such as wind power and solar energy, where innovative plastics are being used for the blades of wind turbines, for instance, and to create solar panels."

Additionally, bio-derived materials are starting to achieve the performance properties of traditional materials, bringing added value to those who want to use them.

"These and other bio-based compounds offer us a competitive differentiator to original equipment manufacturers that are targeting green consumers," says Kahler.

Meanwhile, sustainability is no longer just a buzzword: "Sustainability as it pertains to green products and technologies is a big deal," says Apte. "We can expect this to grow significantly as consumers, legislators and nongovernmental organizations push for the use of more recycled content, lower carbon dioxide footprints, and more eco-progressive materials."

But sustainability as it pertains to the industry is different, the SABIC IP general manager points out.

"Here, lower capacity utilization typically weeds out the weaker players and the evolution cycle will result in a stronger, possibly fewer players, in compounding, especially as independents struggle, and large resin suppliers utilize their own compounding."

More alliances between independent compounders and resin suppliers will be a trend resulting from this, he notes.

How the plastics market might be changed after any economic recovery cannot be assessed, says Virosco, until end-market behavior is determined. "Will consumers return to their previous spending habits or will they increase savings and reduce consumption? If the latter, what is cut?" asks the consultant.

The outlook for compounders is uncertain and depends on how fast the automotive sector recovers in light of ongoing changes, like the General Motors bankruptcy, notes Virosco.

But the "drivers are acquisitions and consolidations as we come out of this difficult period," he says.

"Become better or not survive," warns DeSpain, who also projects further industry consolidation. "The companies that did not make changes to survive will either cease to be in business or will have been bought by a company that did."

Changes will also occur in ordering procedures. Larger orders will be placed, but with the emphasis on "just in time" deliveries as companies will no longer want to carry large inventories of stock.

"Long-term resin contracts will become more popular to try and smooth out the bumps in resin pricing and to enable suppliers to offer long-term contract pricing to their customers," DeSpain says.

For more analysis, read Paul Hodges' Chemicals & the Economy blog

By: Ivan Lerner
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