SAN DIEGO—The hose manufacturers meeting with their distributor customers at NAHAD's annual convention in San Diego had a lot on their minds—some of it good news and some of it not so welcome.
On one hand business is good. Virtually every hose maker and distributor was basking in the glow of rising sales. They reported that most markets—with the exception of construction—were showing upward trends.
The one industry segment mentioned in glowing terms most often was energy, with opportunities in oil and gas, and the natural gas drilling boom in several parts of the U.S., leading the way. The Marcellus shale projects now prevalent in Pennsylvania, the Dakotas and several other areas received particular attention, as those applications literally can use miles of hydraulic and industrial hose.
But on the other hand, the hose companies are being increasingly impacted by the rising cost and tight availability of raw materials such as natural rubber, along with other commodities, including steel used in hose reinforcement and fittings. That is putting a damper on profit margins and causing most to enact or consider price increases to recoup at least some of the increased costs.
First for the good news. Most said sales for 2010 rebounded strongly from a dismal 2009 and continued that way during the first quarter of this year.
Roy Pyle, vice president of business development for Jason Industrial Inc., said revenues climbed about 20 percent last year for the part of the company that he oversees.
That upsurge hasn't abated so far in 2011.
“Our business trends are up,” according to Pyle. “Things are still continuing to move along.”
Novaflex Group in Canada also saw revenues climb about 20 percent in 2010, and they are running even stronger than that in this year's first quarter, according to Chairman Ian Donnelly. “I'm sure there's a lot of catch-up being played,” he said. “People let their inventories run down.”
His firm also is benefiting from having its manufacturing based in North America, as he has heard from many customers that there is a big delay in getting imported goods.
“The whole supply chain is stretched out,” Donnelly said. “It's a constant refrain we're hearing that they can't get product from offshore in the timely manner they need. So they're coming to us and we're delivering in three to four weeks.”
Gates Corp. is another firm that had a big bounce back in 2010 and expects the momentum to continue. “We not only dug ourselves out of a hole but I think we have managed to make some strides in terms of market share and what we believe to be revenue gains that I think lead the industry,” said Terry Weeber, vice president of global marketing and product capability. “And we've seen nothing that tells us that our markets are really cooling their jets at all.”
Business has been trending the right way for a number of months for Flexaust Co. Inc., said Mike O'Brien, vice president of sales and marketing. “It's fun to come to work,” he said. “The customers who were down in the downturn seem to have come around, and the new markets we've entered have been good for us and added to our growth.”
Right now, virtually every market is experiencing growth for Eaton Corp., said Jeffrey Finch, vice president and general manager in charge of fluid conveyance products in the firm's Hydraulics Group. “One of the ones we're watching in terms of recovery percentages is the on-highway truck market,” he said. “It's been basically soft in the U.S. since 2007.”
Rich Balka, president of Home Rubber Co., does expect his firm's growth to level off a bit as 2011 continues. That's because when compared quarter to quarter, the first three months of 2010 were still a bit flat coming off of 2009 before heating up the final three quarters of the year.
The new gold rush
Jason Industrial is among the many manufacturers and distributors that have benefited from the shale natural gas projects, along with an expansion in gas and oil markets. “That's consuming a lot of our products as well as others, so there's been some expanding market on top of the growth,” Pyle said.
The shale drilling prevalent in Pennsylvania is now moving into the Dakotas, with the applications using major amounts of the firm's water suction and petroleum hoses.
“Up in the Dakotas it's like 'Tent City,' ” he said. “We know distributors that have businesses, and they use one office as their business area and the other one as their sleeping room.”
Donnelly said Novaflex had developed a number of hose products for shale projects in Canada and now is seeing growing opportunities for the goods in the U.S. as well.
“Oil and gas is a key market for Gates, and we all know that business—especially the upstream part—has been pretty robust, with the exception of the Gulf of Mexico,” Weeber said.
And it's not just these areas, but any business connected to energy in general that is trending upward, said Jim Hill, general manager of Veyance Technologies Inc.'s Industrial Products Business. “Whether it's coal mining, oil and gas, or wind power—anything along those lines is growing significantly,” he said. “Even some of the hard rock industries such as copper and iron ore are going strong right now.”
The other shoe
Of course, in this market, the good news must be weighed against the backdrop of rising prices and tight availability of certain materials.
Balka said the spike in NR prices of 65-70 percent since September is starting to push some people away from natural rubber in applications where they can switch to an SBR or SBR blend. He said what bothers him most, though, is that while he can understand the rise in NR prices to some degree, some makers of EPDM and neoprene also are boosting prices with no real justification.
Home Rubber also is hit from both sides, since its Ivanhoe Division is a supplier of custom mixed compounds. “Because there is not as much labor involved or value added, your margins are tighter and you don't have the leeway to absorb a lot of the materials increases,” Balka said. “We see it more there than we do with finished goods. But with natural rubber, the prices are going to have to be passed along in finished goods. And I think generally at this point everybody understands because we're all in the same boat.”
A number of hose producers at NAHAD said they have enacted one or more price increases recently, including Jason Industrial, Gates, Eaton, Flexaust, Novaflex and Veyance, among others.
Veyance said it does everything it can to do such things as reformulate products when possible to minimize what it has to pass along to customers in the form of price increases, said Chas Seymour, general manager and vice president for North America. But when they have to pass costs on, Veyance makes sure to give as much information to its distributors as it can to explain the situation.
“We want to help them communicate that message to their customers so they understand what's coming, why it's coming, and to make sure they understand this is not a profit center for Veyance,” he said.
Pyle said a number of factors contributed to both the pricing and availability concerns. One of the tsunamis wiped out a good deal of NR crop; the automotive industry rebounded faster than expected, heating up the competition for similar materials; and the expanding markets in Asia are now consuming more of their own output rather than having it available for export.
Donnelly said while it's true that costs have gone up significantly—not just in raw materials but also for such things as cardboard used in shipping and freight rates—companies must work hard to figure things out.
“We're trying to get some sort of balance where you're keeping the customer happy and still be able to provide a profit to us,” the Novaflex president said. “Let's face it, after 2008 and 2009, (the industry) needs to start getting profitable. If we can't make money in this market, we'll never make money.”