From choosier customers to reindustrialization, change is proliferating in North America (NA) with major implications for polymer producers who must adapt on a number of fronts to maintain or gain market share in the United States (US).
For starters, NA polymer end-market growth is flat, but industrial customers are undergoing rapid transformation after a period of profit upheaval related to low oil prices. Investment in new processing machinery will demand greater polymer supplier performance as processors will resist allowing their newfound advantage to be chipped away. Polymer producers will likely need to rethink their innovation approach, assimilating new technologies and business models.
Reindustrialization is continuing to happen in NA, as we first predicted several years ago in our study “Global Shifts in Industrial Investment.” While NA’s main manufacturing competitor, China, experienced high levels of investment in the past four years (at US$333 billion), overall levels have declined from the previous four years. More interesting is that over the past four years the change in NA investment is estimated to have risen by US$188 billion versus a slight decline in the previous four years.1 Most of the new investment has been in the US and Mexico. See Figure 1. The link between US and Mexican trade is very strong and their manufacturing industries are closely linked, with Mexico participating in varying points in the supply chains of basic, semi-finished and finished goods destined for NA markets.
Oil profits flow down the value chain
Reindustrialization has a different intensity in the hydrocarbon materials value chain. While NA petrochemicals profits have been rising steadily due to low-priced gas-based chemical feedstocks, downstream customer industries’ return on sales (ROS) had a mixed picture. Converters of plastic products and some rubber goods benefitted from the drop in oil prices, especially those that had contracts indexed back to oil prices. Final finished goods manufacturers generally did not benefit, except for automobile manufacturing, which profited not only from the drop in oil price, but other commodities prices.2
There has been pent up demand for plastics and rubber processing machinery for several years as profit levels could not justify new equipment capital expenses. Many extrusion shops had equipment technology from the 1990s. In the past, economic downturns were short and came around every five to six years. The economy has never fully recovered from the 2008/09 downturn, eight years ago and counting.
Processing, converting & fabrication reindustrialization
Manufacturing investment downstream of the polymer industry has been exceptionally strong recently, as indicated by machinery imports and mentioned in a previous blog. This investment has been particularly robust since the drop in oil prices in the later part of 2014, giving downstream processors some breathing space in margins, as seen in a rolling ROS index represented in Figure 2.
We can get a good idea of processor investment from import data on plastics and rubber machinery for NA, as seen in Figure 3. From 4Q 2014 until 1Q 2016, NA plastics and rubber machinery imports shot up by 23 percent, before slowing a bit in 2Q 2016. Most machinery investment growth occurred in Mexico (32 percent increase), followed by the US (19 percent increase). Canadian imports declined by 12 percent, likely because of the commodity slump’s effect on Canada’s economy.
Processors/converters, which are users of raw polymer, are investing mainly to meet performance needs and to prevent further import competition.3 Investment is essentially to do the following: improve productivity, increase scale economies, reduce scrap, enable the use of new and/or sustainable polymers, raise energy efficiency and implement new production technologies. In other words, the expenditures are to stay competitive¾not for strong North American demand growth per se. They are buying machinery to survive.
Impacts on polymer producers
This has profound implications for plastics and rubber producers, especially those investing in new capacity. See past blog on volume impacts.
The first, obvious impact is that domestic market players (i.e., processors/converters) are competitive survivors. But that doesn’t mean it’s an easy volume sale. Processors will not accept a whittling away of their improved competitive position by poor supplier performance, especially as NA becomes a buyers’ market with all the new resin capacity being added.
Downstream players will be more demanding in terms of supplier innovation and performance, across all dimensions (product, service, delivery, etc.).
For instance, the food industry represents a driving force for packaging innovation. Since 2004, the share of linear low-density polyethylene (LLDPE) film used in food packaging (versus other LLDPE film applications) rose by nine percentage points,4 indicating LLDPE’s growing dependence in food packaging applications. Food manufacturers will not easily tolerate repeated line outages due to poor material performance on their machinery. One area of innovation may be to find ways to lower the number packaging processing steps, since fewer processing steps would lower total costs. Other innovation needs include “close-ability,” such as in pouches; aesthetics; increased shelf-life (barrier properties); productivity; sustainability and cost reduction.
Another example is the rubber industry. After several years of robust automotive output growth and higher tire margins associated with lower raw material costs (due to low oil prices), the tire industry is expanding capacity (over US$3 billion announced for NA over the past year5) and employing the latest tire technology. Tires are increasing in complexity in terms of construction, formulation and production methods. Also, high value added (HVA) tires are gaining in popularity in NA. In the tire industry, these tires are associated with high technology, performance and margins. Innovation is centering on fuel efficiency, wear resistance, driving performance and noise reduction. This is forcing changes in machinery, formulation and tire construction. Suppliers will need to accommodate the need for quality, reliability and new ingredients.
A further example is in the medical market. The approved specifications (e.g., by FDA) of many medical devices may be based on products and processes now considered dated. It will be difficult for new manufacturers to compete in these applications. New entrants would need to invest in essentially antiquated machinery, products and techniques. However, long term dedication to developing future plastic/rubber medical products can have a strong payout, with long term supply arrangements of up to 20 years or more. As medical equipment manufacturers expand globally, their need for sustainable products rises, since overseas buyers have strong government ties (i.e., nationalized medicine) and purchasing contracts increasingly include sustainability criteria.
Stepping up innovation
Polymer producers, from polyolefins to elastomers, need to step up their innovation and performance to serve the domestic market. This is especially of concern to those without a historic, long term experience in polymer research and application development, as illustrated in Figure 4 and explained in a past blog.
A key is to have first mover advantage to reap the highest margins. In some areas this may be critically important to avoiding government regulation, such as in the area of sustainability. Processors across the board agree that sustainability drivers are not going away. Whether it is recyclable flexible packaging or greater fuel efficiency tires, there is a value to being the first. If no producer “moves first” with a new solution and government decides to force change through regulation, all players will be made to conform simultaneously, with no margin advantage. This happened when the US federal government enforced efficiency standards for clothes washers. The appliance industry had to invest to meet the new criteria at the same time, with oversupply and very poor return on investments.6
Some recommend steps and areas of focus for polymer producers include:
Changes are happening rapidly in NA and those who stay ahead of the innovation curve will lead in performance.
1“Accenture Research analysis of Oxford Economics data.
2Jie, Ma. “Toyota, Nissan Seen Boosting Profits on Commodity Prices,” Bloomberg, January 28, 2015, http://www.bloomberg.com/news/articles/2015-01-28/toyota-nissan-seen-boosting-profits-on-commodity-prices (accessed October 1, 2016).
3“Based on discussions with downstream participants.
4 Per data from the American Chemistry Council’s Resin Review 2016; share change from 2004 to 2015.
5 Davis, Bruce. “Tire makers invest $10 billion in expansions, improvements,” Rubber & Plastics News, September 13, 2016, https://www.rubbernews.com/article/20160913/NEWS/309059996/0/20140307 (accessed October 1, 2016).
6 Based on discussion with an appliance manufacturer.
Figure 1 - Accenture Research analysis of Oxford Economics data.
Figure 2 - Accenture Research analysis of Dow Jones Capital IQ data on 88 public companies across the value chain.
Figure 3 - Accenture Research analysis of IHS Global Trade Atlas data.
Figure 4 - Accenture Research analysis of data from Thomson Innovation (© Thomson Reuters 2014) and Nexant volume data (Nov 2015).