2015 Adhesives and Sealants Raw Materials and Chemicals Roundtable
What's happening in the often-tumultuous raw materials and chemicals sector?
Raw materials and chemicals are the backbone of the adhesives and sealants industry. Whether commodity or bespoke, each adhesive and sealant product must start with the right materials if it has any hope of success. But what’s happening in this often tumultuous sector?
To find out, I recently posed a number of questions to leading materials and chemicals suppliers, industry leaders, and the ASI online community. Following are their insights into this complicated but vital aspect of the industry.
Merger and acquisition activity among raw materials/chemicals companies has rekindled of late. What does this mean for the adhesives and sealants industry?
Marc Benevento, Managing Director, Industrial Market Insight: Chemical supplier consolidation often leads to product line rationalization and discontinuation of products used in adhesive formulations. This can require downstream products, such as adhesives and primers, to be reformulated, triggering a lengthy and costly requalification process for many applications. Ultimately, this consumes resources at adhesive manufacturers and their customers, who spend months (even years) reinventing the wheel rather than advancing technology.
Greg Bunker, Global Business Director for Adhesives and Functional Materials, Dow Packaging and Specialty Plastics: Traditionally, the adhesives and sealants industry has been a very fragmented market. As we see more M&A occurring, I think it suggests companies want a bigger footprint that increases the number of markets they can serve and provides customers with a broader set of technologies. This shift is why Dow is operating under a foundation of “Science that Connects.” It reflects how Dow has adhesives serving the packaging, automotive, building and construction, and consumer sealants markets, and we are also a large supplier of a broad base of chemistries and technologies that deliver the ability to develop new adhesives.
Scott Coring, Vice President of Sales & Marketing, STI Polymer:It appears private equity firms will remain aggressive in purchasing smaller adhesive and sealant manufactures. For adhesive manufacturers, this indicates fewer competitors, but ultimately they are creating larger companies with diverse product offerings spanning a variety of markets. Strategies will need to be adjusted to recognize a new playing field, one consisting of larger players with boundless purchasing power but restricted flexibility.
John Duffy, Manager, Easterly Research: Chemicals M&A probably means more negative than positive going forward. Certainly, there was a time when the customers and applications in the adhesives and sealants industry did not have the critical mass to attract the attention and product line design efforts of many chemical companies. So the first rounds of consolidation probably brought new materials and application knowledge from the “new” or re-branded suppliers. Those were the positive, Webster-definition synergies, fairly quickly followed by the euphemistic synergies that were about structural cost reduction.
I would expect the next round of M&A to be more of the latter model, resulting in product line compressions that necessitate reformulations (job security for chemists) but also stagnation of new product offerings. There are certainly exceptions to this trend of reduced service, especially with some Japanese companies, who may be sensing opportunity in the consolidation of their competitors.
Something that might actually be more interesting and positive could be consolidation in the engineering and process design industries to facilitate value improvement in manufacture of adhesives and sealants.
JP Kuijpers, Business Unit Director, Adhesives, Eastman Chemical Co.: Eastman has certainly been active in the acquisition space, having successfully completed four acquisitions in 2014 alone. We continue to look at the M&A market and will continue to be disciplined about looking for attractive opportunities. We look for bolt-on acquisitions that reinforce the existing businesses like we’ve done in the Adhesive & Plasticizers business over the last several years, and we remain open to attractive additions to new opportunities for our company as well, like you’ve seen with our Solutia and Taminco acquisitions.
As a raw material supplier to the adhesives and sealants industry, consolidation has encouraged Eastman to be more innovative, and to deliver solutions that help our customers add value to their customers. New product launches in Eastman’s adhesives and plasticizers businesses, such as VersaBond in Q4 of last year and a new adhesives product we will launch in the spring, have helped our customers differentiate themselves from the rest of the value chain. Cost pressures will always be an issue, up and down the value chain, so our innovation is focused on reducing total system cost through greater product efficiency and raw material integration.
Dan Marvin, Director of Technical Services, MAPEI Americas: As the U.S. economy picks up steam, the availability of certain materials will be spotty and prices high compared to historical levels. There has been a great deal of consolidation in the supplier base and idling of capacity that can’t be quickly (or, sometimes, ever) brought back online. Cement-based adhesives will have the added pressure of complying with new environmental emissions requirements and competition from the construction industry. While everyone is anticipating a bit of easing from lower energy costs, in most cases this will be eaten up by increased regulatory and transportation costs.
Keith Olesen, Field Marketing Manager, Arkema Coating Resins: Larger, more integrated suppliers can bring economies of scale, security of supply and the ability to invest in assets. As companies expand geographically through M&A, it is important as a supplier to the industry to be able to offer products of interest to our adhesives and sealants customers locally in the regions where they operate.
To support this, Arkema has been investing in high-growth economies, which are target regions for many of our customers. Arkema Coating Resins in recent years has added manufacturing assets in China and Brazil to support our customers’ growth in these regions.
Patricia C. Souza, Market Segment Manager, LANXESS Corp.: Consolidations in the raw material industry can be very positive due to synergies achieved through this process, such as better product portfolio (additional lines and chemistries), higher investment in R&D and regulatory affairs, and better raw material costs. Overall, economies of scale will have a positive effect at the production chain for raw material and adhesives producers.
Julie O. Vaughn, Vice President, Marketing and Business Development, Emerald Performance Materials: The adhesives industry has gone through significant consolidation over the years, with a good track record for successes. Recently, we have seen companies broaden their portfolios by acquiring companies with complementary products. As these companies expand into profitable niche areas, add new technologies or fill gaps in their portfolio, this may serve to further stimulate innovation in new ways. We see this as very positive.
How does your company address the constantly changing regulatory/legislative landscape?
Bunker: We view the regulatory environment as a challenge and as an opportunity. While many companies can provide adhesives and sealants, a company of our size has global reach, technical expertise in a vast number of markets, and state-of-the-art toxicology and analytical capabilities that provide customers and brand owners with clarity and confidence when navigating this difficult landscape.
As consumers grow more concerned with clean labels and want to understand what is in their food packaging, our teams’ deep understanding of our technologies at the molecular level and how the regulatory environment impacts them allows us to tailor specific solutions to meet customer and brand owner needs. Dow is also working closely with regulatory agencies as new standards are developed. This understanding can help customers comply with the ever-changing landscape, in the U.S. and around the world.
Coring: We feel like many of the regulatory rules the adhesive industry is currently facing will benefit the products manufactured by STI Polymer. Specifically, Rule 1168 (SCAQM) will force the end user to recognize that adhesives do not have to contain regulated solvent to tackle the job at hand. All polymers currently manufactured by STI contain very little (or no) volatile organic compounds.
To address concerns and to stay abreast on the latest information, we turn to associations like ASC and RCMA to keep us informed. STI Polymer is a firm believer in the value that trade associations bring to our business, especially when it comes to being one voice to regulatory groups. Of course, running a polymerization facility comes with its own set of regulatory/legislative issues, so we also maintain dedicated staff allocated to nothing but EHS responsibilities.
Duffy: Our contract customers have changed how they address the regulatory/legislative landscape in two ways. First, they are centralizing the knowledge base to an individual or department charged with staying up to date, which can be critical with the increasing complexity of the landscape. As long as the designated department has a reasonable understanding of the company’s product line, its applications and customer needs (some of which, paradoxically, are not known to the customer), and the recognition that regulatory compliance has both legal and customer service components, this can be a very effective process. It does require rapid and continuous information exchange within and outside the company.
Second, they participate in the regulation-establishing process itself. Instead of being innocent but complaining bystanders as in the past, more companies are contributing data and opinions to the regulators. This does not detract in any way what we have seen from the activities of ASC or any of the coatings associations.
Kuijpers: It is a challenge to stay on top of the many regulatory changes that impact our industry, but Eastman has made it a priority to stay aware of potential changes before they are enacted so that we can proactively share upcoming trends with our customers and develop products that are clear of regulatory restrictions. Intellectual property is another area of focus for Eastman. Markets like personal care and hygiene tend to be highly patented, limiting the utility of solutions on the market. Recognizing the limitations, Eastman has been developing unique new products with advantages like lower odor, lower temperature spray-ability, and better color whose applications are not currently constrained by intellectual property patents.
Marvin: MAPEI is fortunate to have a dedicated team of individuals that is active in regulatory circles and is able to foresee and react to new requirements such as the Globally Harmonized System of classification and labelling, which impacts most manufacturers’ labeling and Safety Data Sheets. We also maintain an active participation in trade groups that monitor and report on upcoming initiatives and allow the industry to have a larger voice in the discussion than individual companies might have on their own.
Olesen: Arkema has a team dedicated to ensuring we are compliant with all relevant regulatory requirements. We also maintain awareness of regulatory and green formulating trends through active participation in industry organizations. As regulations evolve, we must constantly update our product line to allow our customers to maintain compliance while also meeting performance needs and controlling cost.
Souza: Regulatory compliance is a key component of our business strategy. Therefore, we have a team of experts dedicated exclusively to this area. This team is present in several parts of the world to ensure that LANXESS follows and complies with all regulations applicable to our business on both a regional and global scale.
Vaughn: We see two challenges in the regulatory landscape that we increasingly must navigate: a new regulatory/legislative landscape for existing materials and tougher registration requirements for new materials. Like many in the chemical industry, we are impacted by both. Emerald currently offers many products that have little to no VOCs, but continues to expand the available technologies to drive increased performance and address certain unmet needs. There can be significant additional costs involved in terms of time, money and resources to develop innovative new materials and bring them to market. Because of REACH, TSCA SNUR (the “significant new use” rule), TSCA SNUN (the “significant new use” notification), the EU food packaging migration standards EC 10 (2011) and a myriad of other global registrations, the regulatory landscape adds requirements that must be addressed up front and early on in evaluating opportunities and developing new products.
One of the challenges is that there is no “one size fits all” registration process. Another challenge is that some of the testing protocols are under development. More than ever, we focus on working closely with key customers to fully understand the intended and potential uses of a product, a critical piece to understanding all their requirements. In some cases, we rely on the expertise of firms such as Keller and Heckman and Huntingdon Life Sciences to interpret regulatory requirements, recommend appropriate testing protocols that will align with the requirements, and assist in the registration process.
How important is the concept of sustainability in your company’s products and manufacturing processes?
Bunker: Sustainability is simply increasing the value derived from a product while minimizing its impact. While sustainability is something that has grown in prominence over the last several years, it’s also something the industry has been doing for decades. Developing higher-efficiency adhesives that enable coat weight reduction, higher-speed adhesives that facilitate production increases, and functional adhesives that provide more benefits with fewer raw materials are all sustainable contributions.
Dow is also active in shaping opportunities for the end-of-life of packaging, such as recycling and energy recovery. We call this approach “cradle to cradle.” Additionally, we strive to educate the industry that using more adhesives and plastics packaging can actually lower their footprint by reducing overall product loss or product damage. For example, what happens when much of the food produced does not reach the consumer? The resources used to produce the food or goods like water, fuel and other energy are wasted if the product is un-consumable. The U.S. Environmental Protection Agency shares that 13% of U.S. greenhouse gas emissions are associated with growing, manufacturing, transporting and disposing of food (www.epa.gov/foodrecovery). Utilizing plastic packaging to help food stay fresher for longer can ultimately be a more sustainable option that prevents the waste of limited resources and reduces the release of greenhouse gases.
Dow has also developed a Simplified Environmental Impacts Calculator, available to assist our customers by providing a quick breakdown of how different material selections change the overall footprint from “cradle to gate” (i.e., the impact up to leaving the material supplier’s “gate”). Our goal is to help customers do more with less—be more cost efficient, develop lighter packaging, and devise solutions that require lighter coating weights—and also assisting them when evaluating how these changes may alter their value chain. Providing this type of analysis and support, along with sustainable innovations, can provide customers with an advantage when it comes to achieving a lighter environmental footprint and improving their bottom line.
Coring: Sustainability is the key ingredient for a company our size to stay alive! We introduced new products when we opened our facility in 2000 that continue to be our best-selling polymers to the adhesives industry. We believe it was sustainable development introduced by our prior R&D team in Japan that made this possible, and the same sustainable development is the foundation of our North American R&D team as we move forward.
In manufacturing, we believe in a sustainable Kaizen system that we have had in place since the establishment of STI Polymer. Our vision is to enrich the lives of our employees, and we believe having a system is critical to fulfilling this obligation. Manufacturing quality product that customers and the adhesive industry have come to expect demands that we have the ability to retain talented, sustainable employees.
Duffy: Sustainability is making a comeback, almost in lockstep with the U.S. economy. Product concepts rooted in sustainability that were put on the shelf on September 15, 2008 (Lehman Brothers), have been reintroduced with greater sophistication. Of course, this varies by adhesive market.
Kuijpers: At Eastman, sustainability serves as a lens for how we do business and encompasses the triple bottom line—environment, social and economic. As such, we define corporate sustainability goals to support each pillar of sustainability. For example, we are focused on innovating new, sustainably advantaged products that make the world a better place. We have commitments to improve energy efficiencies at our manufacturing locations.
We are also committed to making societal impacts in the communities where we operate. We understand that our approach to sustainability is crucial to the future success and growth of Eastman. Our overarching objective is to embed sustainability across the company and along the value chain as we move forward.
Marvin: This is one area where MAPEI has historically excelled, as our factories are designed for minimal discharge and maximum efficiency. Leadership in the environment is one of the seven pillars of our company globally, and we have backed that up with ISO 14000 certification, multiple product sustainability certifications, and active participation in U.S. and global sustainability efforts. Many of the concepts that are relatively new to the U.S. market (e.g., Environmental Product Declarations, lifecycle analysis, carbon offsets) are mature business practices in Europe, so our Italian leadership has given us a head start in meeting the new requirements of LEED and other programs.
Olesen: Sustainability and environmental stewardship are key concepts for Arkema. In support of our customers’ efforts to develop environmentally responsible products, Arkema Coating Resins offers our EnVia® program that identifies products that meet strict criterion matching the latest industry standards for responsible and environmentally benign formulating.
Souza: Sustainable development is a keystone of LANXESS’ corporate strategy; safety, environmental protection, social responsibility, quality and commercial efficiency are all key corporate goals. This commitment is recognized by LANXESS’ inclusion in the leading sustainability indices Dow Jones Sustainability Index and FTSE4Good.
Vaughn: Reducing our environmental footprint has been and will continue to be a key focus area for our company and a core part of our everyday operations, business and culture. Since 2006, Emerald has invested more than $25 million in capital to HS&E projects and reduced company-wide TRI emissions by 52%, which is much higher than the 16% average reported to the EPA by U.S. Chemical Facilities 2006-12.
Going forward, all eight of our operations are committed to 10% reduced energy use and 30% reduced CO2
emissions per ton of output from 2010-2020. Projects generally will focus on improving efficiencies to reduce waste, reducing or recycling process water, improving water quality, and switching to greener energy sources.
How is the fluctuating global economy impacting raw materials and chemicals used in the adhesives and sealants industry?
Benevento: Fluctuations in the global economy have made it more difficult to balance supply and demand in the short term, resulting in volatile raw material prices. The ability to accurately forecast and manage raw material pricing could become a competitive advantage for companies that are able to do it well. While critically important, the need to constantly manage pricing can get in the way of executing on long-term objectives, such as the creation of well-defined organic growth programs.
Bunker: We see very little impact, because adhesive and sealant products are unique in the sense that most contain a large number of very different raw materials in specialized formulations. With the drop in oil prices, we hope to see an increase in demand for goods like packaging, automotive and construction due to consumers having more disposable income.
Coring: The “shale gas revolution” has ignited the building of petrochemical manufacturing plants in the U.S. With the addition of new PDH facilities and the expectation of more being built and coming on-line in the near future, chemical prices will remain unbalanced. For the near future, this is good news for adhesive manufacturing raw materials; however, big swings in chemical feedstock costs are never good long-term.
Duffy: The last few months have been a wild ride for materials, depending on their value chain. We probably can expect a “new normal” to be established mid-2016, which should be the playbook for another couple of years.
Kuijpers: Raw material prices and sourcing are ongoing issues for any manufacturer. Shortages lead to price volatility, which is not desirable for anyone. One example of this is in the hygiene construction adhesive market. Price volatility for some raw materials, along with product availability, is leading formulators and manufacturers to look at alternative technologies for these hot-melt adhesives, which has resulted in a share shift away from styrene block copolymers toward polyolefin solutions. Customers are more receptive to testing new materials when the existing solutions become unavailable or more expensive. As formulators and brand owners seek out new materials solutions, Eastman is developing the next generation of sprayable olefin-based hot-melt polymers.
Marvin: This is probably a net positive for the U.S. market as global producers look to us for price stability and growth vs. a world economy that is anything but stable. We’ve been able to bring purchases back to U.S. producers in many cases as suppliers expand production or slot more of their production for the domestic market. Although it’s hard to predict where the next supply disruption may come from, having qualified backup sources for critical raw materials is always a wise idea.
Susan Renner, Business Development Manager, Kowa Chemical:While crude continues to drop, in downstream materials there isn’t the same movement. Some commodities like solvents are dropping. More customers are using VOC-exempt solvents to lower costs and reduce VOCs. Eventually, we expect to see some smoothing, as the balance of manufacturing adjusts.
Vaughn:As a raw material supplier to the adhesives and sealants industry, we have not experienced any raw material supply issues as a result of the fluctuating demand in the global economy. That being said, forecasting and managing supplies to appropriate levels can be more of a challenge. Additionally, recent issues with production and availability of vinyl acetate monomer—a key feedstock for adhesives and sealants—has created stress for manufacturers to navigate. As a result, it is even more critical to have a close working relationship with customers and supply partners.
What is the main challenge faced by manufacturers/suppliers of raw materials and chemicals, and what impact might that challenge have on the adhesives and sealants industry? How does your company address that challenge?
Benevento: Identifying and defining organic growth opportunities are challenges at all levels of the supply chain. Since the resources required to work on new opportunities usually do not generate short-term revenue, these are often cut back in periods of recession, which is when they are needed most. Defining growth opportunities requires a different skill set from maintaining existing business, and outsourcing some of this work may help shorten the time to market at a lower overall cost.
Bunker: We see a number of challenges, including a continued push for increased adhesive performance to enable higher efficiencies. One example addressing this is the new product for the European market called MOR-FREE™ L PLUS adhesive. One of the key attributes is that it has substantially reduced mechanical and regulatory cure times to three days, which allows customers to keep less inventory in stock, enables faster cycle time, and reduces working capital.
Bringing new developments to market faster is another area of concern for some customers. Our solution is our global Pack Studios, which accelerates packaging innovation through collaboration across the value chain. One example of responding to market needs was to provide customers with a tool to develop natural-feeling packaging. Our OPULUX™ optical finishes are acrylic coatings that can achieve a low glare, matte appearance and provide a soft touch on packages. This can help customers provide a potential “sustainability” cue for consumers.
Coring: Polymer-producing companies like STI must have a thorough understanding of how the raw materials we incorporate are manufactured; it is vital to our survival. In order to educate our customers, we must first understand. STI Polymer places a high value on our customers and we believe in the importance of individuals understanding every detail involved in buying STI Polymer products. Again, we rely on trade associations for training in areas like “petrochemical basics.” The AFPM show, held annually, is a great resource for the aforementioned topic.
Duffy: From the perspective of someone who works with a number of adhesive and sealant manufacturers, I suspect that there has been too much consolidation in both adhesives/sealants and the supply industries for promotion of effective, crowd-stirring, market-moving innovation. While there are many instances of exciting, even dazzling, innovations from the consolidated enterprises, it appears that the overall pace and magnitude of evolution is not there. But we also see new or reinvented players that are sneaking in under the tent, and they promise to make life fun for all of us.
Kuijpers: Raw material supply is a continual challenge for global manufacturers, and Eastman is no exception. The global use of lighter cracker feeds has led to more constrained availability of raw materials for tackifier resins, which in turn has led to a tightening of the hydrocarbons market.
To address this challenge, Eastman employs several strategies. First, in many of our businesses, we are an integrated manufacturer, which gives the company an enviable cost position. Second, with the expectation that market prices for commodity products, raw materials, and energy costs will continue to be volatile, feedstock flexibility on what kind of raw material can be used provide a mitigation to these changes. Finally, Eastman’s global manufacturing footprint enables efficient delivery of finished products where our customers need them, including in some cases delivering product molten instead of pelletized to reduce conversion costs for our customers.
Marvin: Increases in transportation costs are looming as the industry struggles to find qualified drivers. MAPEI has a dedicated transportation team that can find the best routes, rates and backhauls. Pulling from a supplier base that circles the world, logistics is a huge part of supply chain management.
Other pricing pressures come from suppliers of packaging, from pallets to buckets to bags. Again, our purchasing department is constantly working with our vendors to ensure a reliable supply. A variety of techniques is used, such as long-term contracts vs. spot market buying, consignment agreements, and constantly qualifying backup sources.
Olesen: Volatility in raw materials has been and likely will remain a key challenge for the foreseeable future. As a downstream consumer of petrochemicals, we must work closely with our customers to manage this volatility in a way that is practical and fair for both parties. For Arkema, acrylic resins are an important product line that we offer to the adhesives and sealants market. Here we have been investing in our upstream integration on acrylic monomers to enhance the cost control and reliability of supply for the products we offer to our customers. Our recent investment in Sunke, an acrylic acid manufacturing JV in partnership with Jurong Chemical in China, is a good example of this commitment.
Souza: Regulatory affairs compliance is one of the main challenges of biocide producers serving the adhesives and sealants industry. The effects of globalization directly impact the regulations that apply to our products. For example, if a LANXESS customer is manufacturing an adhesive in the U.S. but exporting its products overseas, additional regulations on the country of destination may apply. As a supplier, we need to ensure that our raw materials are RA compliant not only in North America (federal and state registrations), but in most cases also in others regions (e.g., Asia, Europe, etc.). It is crucial to work together with our customers to understand their process and channels to market to properly support them from a logistical and regulatory point of views.
Vaughn: The regulatory landscape is a significant challenge faced by the industry. We have seen that agencies such as the U.S. EPA have taken a different stance with industry, placing more hurdles and restrictions on manufacturers. This could dampen creativity and the development of new materials and put regions with high regulatory hurdles at a disadvantage in this global market. In product lines such as our K-FLEX® plasticizers, we continue to develop new materials, but are taking a more rigorous approach in our stage-gate process to take these factors into account as they have both cost and timeline impacts in planning a potential market launch. In the short term, consulting firms with expertise in this area will do quite well.
For additional information, visit www.industrial-market-insight.com, www.dow.com, www.stipolymer.com, www.easterlyresearch.com, www.mapei.us, www.arkemacoatingresins.com, www.chemical.kowa.com, www.lanxess.com, and www.emeraldmaterials.com.