Today’s Raw Material Market: Outlook and Opportunities

by Mike Bradley and Scott Horn, PolyOne Distribution

At no time in the history of the plastics industry has there been an era of such dynamic change. Processors are dealing with slowing of demand due to the U.S. economy, higher prices for thermoplastics, and significant changes in the manufacture of thermoplastic resin, as well as restricted access to working capital through the financial markets.

Many of the MAPP members have experienced a decline in sales due to the sharp reduction in new home construction and in automobile builds. The slowdown also has impacted the production in other industries, such as large appliances. As if dealing with lower sales is not enough, processors have had to absorb significant increases in the prices they pay for thermoplastics resin. This has been driven by the price of oil, which has increased from $80 per barrel last year to over $140 at times this year. While the current price trend is clearly downward, there is still upward pressure on many oil derivatives and other feed stocks, such as butadiene and styrene monomer, due to limited production and increased demand. This trend will continue as emerging economies continue to increase their demand for oil.

Supplier Consolidation
Higher costs for oil and natural gas also are driving changes among the petrochemical companies that produce thermoplastic resin. U.S.-based companies have some of the highest costs for feedstocks in the world. The lowest cost feedstocks are in the Middle East. This has been a trend for a number of years. As a result, U.S. plants are generally older and operate without the latest technology. New manufacturing assets are being placed closer to the markets they serve (Asia) and nearer to the lowest cost for energy (Middle East).

On the supplier side, we’re seeing unparalleled consolidation in the North American market, which will continue influencing supply chain and processor options. Over the last couple of years, major petrochemical companies are reducing their asset base and plant capacity, moving assets to joint ventures or selling them outright. This has resulted in new ownership by K-Dow, Sabic, Ineos, and Lyondell/Basell, to name a few. (See table below.) Another developing trend is the ownership of U.S.-based manufacturers by foreign ownership or private equity firms.

Driving consolidations is the fact that chemical companies are adjusting their portfolios for different markets today, focusing on specialization in the pharmaceutical and agriculture markets – they feel they can earn a better return on capital in these areas. North America also is a mature market, with the profitability of most chemical companies down and returns below cost of capital. As a result, we anticipate limited new investments in U.S. assets in the foreseeable future.

Consolidation Effects
With a maturing market and the search for profitability, resin manufacturers are restructuring and looking for cost reductions. They accomplish this by offering fewer resources for application development, less sales coverage with fewer sales reps, reduced technical support, and even tougher credit policies due to the lack of resources to manage this function. Some processors have added these capabilities in-house at significant expense. Still, there often remains a gap between what processors need and what manufacturers provide.

In addition to reducing resources, manufacturers are being forced to consolidate overlapping products due to mergers and to streamline their portfolios to maximize efficiencies and operating rates. These product eliminations, also called product line rationalization, may require some processors to requalify materials, but also may open the door for potential cost-saving alternatives.

Other cost-reduction actions include raising minimum order quantities, adding up-charges, increasing lead-times for small and custom products, and in many cases, levying fuel surcharges. An additional impact of this consolidation is the change in personnel, contacts, and policies that often cause confusion and create inefficiencies during the transition. We see these issues accelerating in the months ahead. Manufacturers will continue to consolidate, in an attempt to improve profitability, and rationalize product lines.

Results for Processors
So what does all of this mean for processors? Through our extensive contacts with processors, one thing we see clearly is that even though economic and industry conditions are difficult, U.S.-based processors who are focused on adding value can compete. They can compete here in North America, and they can compete globally via exports.

To do so requires a focus on specialization and value creation, one that goes beyond quality, lean, and Six Sigma. It also requires that processors fully abandon the so-called shoot-and-ship mentality, becoming instead solution providers and problem solvers.

The most successful processors are those that understand the value they bring to their customers. They seek to develop and understand what they do best and what sets them apart from their competitors. We also see the most successful companies focusing on specific market segments and customers that need, and will pay for, the value they bring.

Successful processors are those which take steps to reduce their service offering, and at times, exit from those customers and markets where they cannot capture the margins they need. This is not a fast or easy fix, but it is a strategy that works. It requires a lot of work internally, but a processor also can get some help from suppliers, asking them to look for solutions that improve service and reduce costs. It means partnering with suppliers and moving beyond a “transaction-based” relationship to a more “strategic” relationship.

Suppliers as Collaborators
There are a number of ways to join forces with a supplier and numerous strategies for managing the changing market and supply dynamics, but it is best to focus on a few, broad areas. While these may not be new ideas, we hope they are at least reminders of techniques that work to reduce costs and generate growth and profitability.

Two obvious areas involve processing improvements and inventory reductions. While processors bring a high level of expertise to the table, there are times when a supplier can help in optimizing a process or suggesting a tool or material change through its technical support team. Processing improvements reduce cycle times and scrap rates while freeing up unused capacity to acquire new business without spending additional capital, which can minimize expansion needs.

Working with suppliers to increase inventory captures space for production or expansion, and also frees up working capital. More frequent deliveries may increase costs slightly, which will most likely be more than offset by capturing more capacity and working capital.

Alternative materials are a third category that can benefit from supplier involvement. Unbiased suppliers can help co-specify materials for new jobs and seek lower cost options for existing jobs, because they can compare and contrast all options without having to propose any one product line. This, in turn, gives processors more options to offer customers and may reduce finished part price. Not all customers can – or want – to make material changes for existing jobs, but having more options for new applications offers the potential for cost savings and provides insurance against product rationalization and eliminations.

Many processors know their customers well and understand their business in depth. The more that is understood about a customer’s business, including the issues and unmet needs they have, the more value a processor can provide. A supplier – acting as a collaborator – can then work to find a product or service solution to fill the customer’s needs.

The End Result
Processors that differentiate themselves from their competitors by offering solutions that meet customer needs realize higher growth and improved margins. This approach requires looking at total cost rather than focusing on price alone. Reducing total cost may involve shifting or trading costs to reallocate resources more efficiently, but the objective is increased profitability for the processor and the customer.

Finally, while improvements in any one of these areas can have a positive impact on a processor’s business, the key lies in looking at all of them through a more strategic lens, and then working to capture at least a portion of the opportunity in every area. Sharing both strengths and issues with a supplier will pave the way toward developing strategies to improve both.

Mike Bradley and Scott Horn are general managers with PolyOne Distribution, which supports its customers’ goals to increase sales and profitability. Sales and profitability are bolstered by partnering with suppliers who can address total costs. The company broadly identifies cost-reduction opportunities through alternate materials, cycle time and scrap reductions, inventory efficiency, supply chain costs, and other factors. PolyOne Distribution looks at both “hard” and “soft” costs, and this strategic approach provides the opportunity to identify business needs and possible solutions. It also identifies strengths that customers can leverage as they move from a “transaction-based” approach to a strategic approach focused on strengths and value.