Tariffs, trade deals, and acquisitions—oh, my! In response to continued uncertainties resulting from ongoing political tensions and changing market dynamics, raw materials and chemicals suppliers are undertaking a number of strategic initiatives. I recently reached out to key players and asked their opinions on a number of issues and trends impacting the sector.
How would you characterize the 2019 raw materials and chemicals landscape?
Eric Dumain, global marketing director for Liquid Resins, Arkema Coating Resins: Compared to the past three years, where weather events such as Hurricane Harvey disrupted several aspects of the adhesives value chain, 2019 has been relatively stable in terms of the already-fragile supply chain. While the ongoing tension in U.S.-China trade relations creates future uncertainty for trade and material flows, our industry has adapted well by building more robust customer-supplier relationships. In this way, the key value chain partners are planning for contingencies more than in the past.
Andrew Hinz, managing director, Grace Matthews: While many chemical formulators continued to experience elevated raw material price levels in early 2019—continuing the trend seen over the past few years—prices for many raw materials stabilized or even declined slightly in the second half of 2019. Easing raw material costs reflect a weakening demand environment, particularly in the automotive and construction markets, and lower oil prices. Slower demand seems to be more pronounced outside of North America.
Despite some relief from stabilizing raw material costs, many downstream chemical companies continue to seek opportunities to implement price increases and cost-management initiatives to offset the significant cost inflation absorbed in recent years. Not surprisingly, tariffs on raw materials imported from China have impacted many chemical manufacturers as well.
Mike McKenna, president and chief operating officer, Maroon Group: The 2019 raw materials/chemicals landscape can be characterized as a year of uncertainty. Macroeconomic and geopolitical impacts have created an immense amount of uncertainty in the market, which has led to destocking and unnatural supply/demand behaviors. We have also seen in some areas, such as products derived from oil and natural gas, deflationary pressure on raw material prices.
Jeffrey Shaw, chief supply chain officer, Sun Chemical: The raw material market has seen improvements in a few categories in 2019. There was a significant level of supply disruptions that occurred late in the first quarter as a result of a few explosions and physical disruptions. Coupled with continued environmental legislation-driven closures, several markets were severely constrained, especially in the pigment and pigment intermediate markets.
Many of these pigments and intermediates are sourced from China and supply was compromised, resulting in increased prices. The market has seen some improvement, but not back to previous levels. The current challenges facing the Chinese market are expected to continue for a few years as environmental assessments and legislation will continue to apply pressure to manufacturers’ costs in order to comply with enhanced operating standards. Our supply chain team has developed contingencies that include sourcing more volume from a broader global supply base and diversifying portfolios in order to optimize our service levels to our customers, regardless of any abrupt market dynamics that may occur.
David Youland, director, The ChemQuest Group and ChemQuest Technology Institute: The 2019 raw materials and chemicals landscape is really a mixed bag, with both headwinds and tailwinds. The boom in U.S. oil and natural gas production driven by favorable shale gas economics is forecast to make the U.S. a net energy exporter in 2020. New domestic supplies of affordable natural gas and natural gas liquids (NGLs) have created a competitive advantage for U.S. chemical manufacturing. This has resulted in substantial investments in new projects to build or expand U.S. shale-advantaged capacity and supplies of ethane, propane, and butane. These are important feedstocks for petrochemical production and serve as adhesives and sealants raw material precursors.
At the same time, slowing global economic growth, especially in Asia and Europe, has resulted in destocking and a deceleration in global industrial production, in part due to trade uncertainty. Capacity additions in the face of slower growth have resulted in depressed margins for some materials producers.
Of course, end markets provide a varied picture, with automotive markets experiencing significant destocking, construction-related markets experiencing tepid growth, and portions of electronic markets and consumer markets on more solid footing. Operational excellence and cost reduction have become the default strategies throughout the value chain amid this uncertain and slower growth macro-environment.
What impact is the current political environment having on raw materials and chemicals?
Dumain: In the context of the U.S.-China trade tensions, more focus has been applied to developing and enhancing regional partnerships to ensure stable supply in the case of rapid cost escalation. Still, most larger players accept that globalization will not really regress to the late 20th century state of affairs, before global trade flows were an everyday business practice.
With respect to Brexit, the first half of 2019 saw customers and suppliers working hard to ensure no shortages would occur if Brexit occurred as expected. After the perceived catastrophe was delayed, the market sentiment relaxed to the point that the majority of firms do not see an eventual Brexit as a major disruption—the hope is that the worst has passed.
Tariffs on Chinese raw materials continue to play a role with building and construction manufacturers in North America. As these tariffs are modified or dropped, the landscape for competition continues to vary. This has led to some difficulty in forecasting month-to-month costs for manufacturers and responses needed by suppliers.
Hinz: Political tensions with China remain a front-and-center issue. Over the last 18 months, chemical formulators have been forced to institute price increases and modify their supply network as a direct result of the U.S.-China trade dispute.
While talks between the U.S. and China appear to be progressing, most manufacturers cannot afford to take a “wait-and-see” approach. We see many companies moving quickly to qualify raw material sources from companies outside of China, requalify alternative raw materials, or (often as a last resort), raise prices to manage the cost impact from tariffs.
McKenna: The current political environment is having a significant impact on raw materials and chemicals, particularly as a result of the several rounds of tariff increases on materials produced in China. Our organization has actively participated in the tariff hearings in Washington to support our key customers and principal partners.
All of this uncertainty around tariffs has affected the normal supply and demand conditions we’ve historically experienced. Customer destocking or ordering in advance of tariffs, as well as customer exports, have been negatively impacted. The slowdown in European, Chinese, and North American markets in the industrial segments can be directly tied to these tariff adjustments.
Shaw: The trade disputes and increased tariff initiatives on Chinese products have applied significant pressure to many raw materials and intermediates. Sun Chemical remains committed to sourcing high-quality and economically favorable materials to support our customer requirements. This requires keen attention to various markets in order to capitalize on opportunities and mitigate risks.
Youland: Trade uncertainty and the resulting tariffs are impacting global growth, as well as U.S.-to-Asia exports and Asia-to-U.S. exports. Much of the aforementioned investments were made with the expectation of growth to export markets in Asia, especially to China. In some cases, trade flows have been diverted away from U.S. exports, which may be difficult to change in the future.
Moreover, the uncertainty surrounding trade is resulting in delays in added domestic investments and is making future investments and joint ventures/alliances in Asia much more uncertain. Protectionism in Europe (including Brexit) is contributing to uncertainty in that region.
While players in the materials and chemicals industry are supportive of efforts to curb unfair trade practices and intellectual property theft, there is concern that the tariff dispute could become a war of attrition, resulting in more harm than good. Amid all of this, the looming 2020 U.S. election provides additional concerns and uncertainty.
How are mergers and acquisitions affecting the raw materials and chemicals marketplace?
Dumain: Activity in this space continued the consolidation trend, which should ultimately benefit consumers by bringing individual company innovations to bigger scale. The adhesives and sealants marketplace is still relatively fragmented compared to heavily consolidated markets such as architectural coatings, so we should expect more M&A activity, especially when interest rates remain attractive for financing deals and economic signals remain strong, at least in North America.
In building and construction markets, M&A (specifically in the PVC building products area) continued in 2019. This is consolidating competitors and putting stress to drive costs lower for manufacturing.
Hinz: After a several years of “mega-mergers” dominating the headlines, 2019 was a year that featured more “bolt-on” acquisitions and corporate divestitures. Companies are using M&A as a way to expand their product offerings, access new end markets, and expand their geographic reach.
In addition, we are seeing large chemical companies more open than ever to “pruning” non-core businesses. One example of this is Arkema, which divested its functional polyolefins business to SK Global Chemical, and separately announced the acquisition of ArrMaz, a manufacturer of specialty surfactants. These transactions are consistent with Arkema’s ongoing transformation into a more specialties-focused, higher margin chemical company. We expect divestiture activity to continue at a healthy pace, as companies review their portfolios following several years of acquisitions.
McKenna: Merger and acquisition activity continued at a robust pace in 2019, and Maroon Group has been an active consolidator on the distribution side. We believe scale matters and therefore have been aggressive in building out a North American specialty chemicals and ingredients distribution model to meet the needs of our customers and principal partners. We anticipate that consolidation will continue, as companies look to offset tepid organic growth in their underlying markets.
Shaw: We have not really seen any significant impact from supplier consolidation recently. There has been some activity in markets that include TiO2, energy cure, and specialty chemicals, but overall there has not been an impact to our supply chain. We continue to work with suppliers and communicate our supply plans to help avoid any issues. For us, this has been an effective and sustainable supply strategy.
Youland: While organic growth, especially in Asia, has been a growth driver for the raw materials and chemical industry, growth through M&A is also important. The overall chemical industry has been stable, with between 500-650 transactions annually over the past decade.
Pressure for growth in a weakening macro-environment, along with pressure from activist investors for public companies, should result in a continued strong M&A environment. Private equity (PE) investment funds reached record levels in 2019 and have a lot of “dry powder” to invest. This is resulting in a sellers’ market, with PE firms willing to accept lower returns and deals commanding high price earnings multiples.
Mergers and consolidation with downstream end customers are resulting in supplier rationalization that, in turn, is putting additional pressure on raw materials and chemical producers to reduce costs. Consolidation in the coatings industry is driving exploration of adjacent markets, including adhesives and sealants markets, making adhesives and sealants companies potential M&A targets. Finally, while the circular economy may not have driven M&A activity in the past, these efforts may provide a future area for chemical producers, including adhesives and sealants companies, to invest in additional technologies or acquire technologies through M&A that will provide growth in this emerging area.
How are concepts such as the circular economy and recyclability being addressed through raw materials and chemicals?
Dumain: The concept of “circular economy” has become an important aspect of sustainability, but there are still challenges to further integration in the chemical industry. That said, new products and services are being created by adopting blue ocean innovation strategies and future market collaborations to modify existing raw materials and developing new ones.
Sustainability is a strong aspect of Arkema’s operations, including circular economy and recyclability, segmented into several distinct categories: support of new energy technologies; bio-sourced materials; materials for water filtration applications, home efficiency, and insulation solutions; and lightweight materials for composites and 3D-printed consumer electronics. Arkema scientists and business teams continue to push new boundaries in product innovations to help with sustainability. In our own manufacturing operations, and in collaboration with key customers, we are lowering the carbon footprint by reducing emissions and waste, using raw material inputs that are greener, and increasing efficiency of Arkema plants and supply chain logistics.
Hinz: Companies are becoming more and more cognizant of concepts like the circular economy and recyclability. As technology has been developed and refined over time, “green” chemistry is no longer just a marketing statement—it’s become a requirement of customers in response to consumer demands and increased regulatory scrutiny.
As a result, many chemical and plastics manufacturers are committing to efforts that reduce waste, incorporate renewable feedstocks, and reduce the industry’s overall impact on the environment. For example, major global chemical companies such as Total, Borealis, and LyondellBasell have shown their commitment to the circular economy through acquisitions of plastic recycling companies.
McKenna: Corporate social responsibility and sustainability are incredibly important to not only Maroon Group, but also our customers and principal partners. This is being driven by the needs of our customers and their end markets. We’ve strongly supported efforts with innovation and sustainability and have been a longstanding supporter of EcoVadis. We continue to strive to look for sustainable solutions that help our customers create value and differentiate our products. Water-based and green technology adoption rates in sealants and adhesives continue at a robust pace.
Russell Schwartz, chief technology officer, Sun Chemical: At Sun Chemical, we remain strongly committed to corporate social responsibility. We continue to conduct business with suppliers that are compliant with environmental regulations and committed to the ideals of corporate social responsibility.
The aim of Sun Chemical’s sustainability initiatives relating to raw materials used and its manufacturing processes is to increase the plant-based biorenewable content (BRC) and/or recycled content in Sun Chemical products. This reduces the products’ effective carbon footprint and reduces the company’s reliance on finite oil and coal resources. Having less fossil-based carbon in packaging will help with climate change.
The focus of Sun Chemical’s sustainability initiatives related to end-of-life of products and how they interact with recycling processes is to assist Sun Chemical customers in making products easier to recycle and promoting the development of circular economies. Recycling can be through a mechanical/chemical route or through a biological route.
Youland: Most raw materials and chemicals companies have a sustainability strategy of some sort in place. Sustainability has evolved from going beyond compliance and dealing with NGOs to become more strategic in nature. At the same time, raw materials and chemicals companies have struggled to justify investments in sustainability, and end customers are often confused and unwilling to pay premiums for materials with incrementally improved sustainability profiles, especially in the face of slowing economic growth.
The term circular economy refers to a model where materials are repurposed after use rather than disposed of in landfills or elsewhere. This model not only helps to keep materials out of the environment, but it leverages their value to create new products. We’re seeing increased interest in this model, but there is uncertainty about how to best implement it or how it best fits within current businesses.
As an example of this model, Eastman Chemical recently announced the commercialization of its chemical recycling technology and a partnership with Circular Polymers to reclaim carpet fibers that will be used as feedstocks for several products. Industry participants
will be watching to see how this evolves over time.
What sectors is your company targeting for growth in 2020 and beyond?
Dumain: The Coatings Resins business at Arkema, which includes materials for a wide range of adhesive applications, is focusing efforts in 2020 on multiple sectors, most notably building and construction, packaging, electronics, and automotive applications where lightweight materials are key to future growth. Innovative products that offer higher performance in rheology and durability and lower environmental footprint are at the core of the growth platforms.
For decades, we have been a leader in developing new technologies related to solvent and waterborne acrylics. Arkema is continuing to invest in this area and bringing value-added innovation on a global basis. We continue to develop new products that offer increased ease of application, hydrophobicity, adhesion to diverse substrates, balance of flexibility and strength, and UV and chemical resistance.
In recent years, Arkema has increased product and business development efforts in specialty adhesives, including pressure sensitive and structural adhesives. As a company with the ability to manufacture both solvent and waterborne polymers, Arkema strives to be technology agnostic and focused on servicing market needs in an environmentally responsible manner.
Hinz: We expect broad-based M&A activity to continue throughout the chemicals and specialty materials value chain in 2020. In particular, markets such as paints and coatings, adhesives and sealants, specialty lubricants, flavors and fragrances, and specialty ingredients are particularly well-positioned for M&A activity due to their structurally higher margin profile and fragmented landscape. In addition, Grace Matthews has completed a variety of corporate divestiture projects in recent years, and we expect our carveout work in 2020 to expand further.
McKenna: Maroon Group is extremely optimistic about the growth prospects for 2020 and beyond. Because of the underlying market fundamentals in place today, North America continues to have significant opportunities for growth in the majority of the markets that we serve.
Over the last several years, we have focused on diversifying our market exposure to provide a greater level of stability for our customers. In addition to a recovery in U.S. industrial markets, we also see continued growth in personal care, HI&I, food, beverage, organics, and naturals. Water-based and low- VOC technology will continue to drive our growth in the sealant and adhesive sector. Trends for clean, green, and organic products are driving much of this growth.