John Televantos, senior partner with Arsenal Capital, has many years' experience in the North American polyurethane and chemicals industries. He gave the keynote address at UTECH North America 2018 in Charlotte, N.C., in 2018.
Demand for polyurethane across NAFTA grew by about 4.4 percent per year between 2014 and 2016. Growth between 2016 and 2018 is continuing at that level or higher. Compounded annual growth in the US was closer to 4.6 percent. While in Canada demand is closer to 2.7 percent. Between 2014 and 2016 and in Mexico demand growth was a little higher than Canada.
Polyurethane production volume over the same period has volume has increased by about 2.4-4.4 percent, and is now around 8 billion pounds. The first time the production has the past the pre-crash level of 2006 of 7.6 billion pounds.
This growth is being driven by a few undeniable consumer trends. These include: Personalization from clothes to cars, to furniture; Continued urbanization; greater investments in personal technology and personal comfort; greater environmental awareness; and, a greater interest in to prevention in health and wellness.
Many of these trends rely on polyurethane innovation in part or all of the solution.
Part of the solution
Historically, the chemical manufacturers were the innovators. Chemical manufacturers and their customers produce new, useful products for existing and new end markets.
It is the chemical industry that really created some of these end applications. But, over time, the large chemical manufacturers became increasingly distant to the end consumer and end users of our products. The growing use of polyurethane has made it impossible for upstream suppliers to keep abreast of all those changes. So the responsibility for innovation moved downstream to the converters.
Over the past 20 years converters have increasingly taken the greater responsibility for innovations which are enabling our industry to continue to grow. Converters are more responsive and closer to end customers than distant chemical manufacturers.
They know the end customer so much better than an upstream chemical company can possibly do. The chemical companies have continued to innovate in terms of better production, increasing scale, safety, environmental compliance that enabled consistent quality supply at larger volumes.
Another trend in our industry is continued consolidation. We are doing our part at Arsenal.
Specifically in polyurethane functional foam in North America. The number of large players has shrunk from 92 now to five over the last few years. The economies of scale that has been created in polyurethane manufacture, has increased the commitment to the business, funded greater innovation and led to growth.
One of the most attractive high-growth segments is specialty foam and bedding.
The market is growing quickly and this is being driven by direct-to-consumer marketing for mattresses with the bed-in-a-box phenomenon. These products are easy to transport and have and the eliminated all supply chain steps.
This technological change is coinciding with macro demographic changes. These have shifted purchase behavior and are increasing replacement rates for mattress and other bedding component. In some recent research that I found, in 2017 consumers were reporting keeping their mattresses for an average of 10.3 years. Today, the median replacement time is 8.9 years. That's replacement rate is adding to the enhancement in growth and also better innovation for better products.
As you may have heard, recently, Tuft and Needle, the direct-to-consumer marketing company, has agreed to merge with Serta Simmons and this is likely to put renewed emphasis on the direct-to-consumer channel.
The bedding industry is also placing greater emphasis on performance. For mattresses, this means the top 5 inches. This is what provides the support and comfort in a mattress. This is also driving greater demand for polyurethane foam.
Substance over style
On the other hand, furniture is sold on style and appearance, rather than cushioning performance and durability. And the opportunities for new technology are slower.
So, in bedding the overall industry is growing at greater than 5 percent per year while, traditional mattresses are only growing at 2 percent.
The direct-to-consumer business is driving overall growth. This has been growing at more than 100 percent. As the scale grows, the growth rate will diminish but, its proportion of the total sales growth is in fact increasing. Given the convenience, lower cost, and excellent quality, direct-to-consumer experience is will outpace can traditional channels for a very long time.
Further innovation for durability and comfort in polyurethane foam is only desirable at the high end of furniture statements we do not see furniture has been a driver of revolutionary change as we see bedding.
In the automotive sector, there is continued, very significant dependence on polyurethane innovations. Vehicles are getting lighter, so the importance of sound insulation and dampening is key. This is driving increased polyurethane content per vehicle.
The acoustic segment of the North American transportation market is worth over $2 billion per year and growing. Foam content per vehicle, despite a reduction in the overall weight of vehicles is in fact growing. This is because polyurethane foam provides performance, comfort, vibration reduction and noise reduction and fuel efficiency.
Comfort and performance
In automotive seating, major changes continue, but not all of those are foam innovations. Specifically, consumers continue to want greater support and temperature regulation which can be solved through a combination of technologies.
In the automotive sector, light weighting has given rise to a greater need for adhesives and sealants to solve many problems of automotive design. Urethane sealants are used in increasingly to reduce noise and vibration and harshness and also to bond dissimilar materials.
Primary areas where adhesives are used in automotive in the floor, dash panel, roof, doors, and, even breaks. The introduction of lighter, thinner materials and dissimilar materials such as composites and metals require more noise and vibration dampening and are more demanding adhesive applications. Foam and other barriers are replacing traditional approaches such as fiber.
In addition, structural adhesives are enabling light weighting and dissimilar material bonding. They are used because they strength and rigidity at elevated temperatures. They also have increased the static and dynamic stiffness which allows for improved safety, crashworthiness and performance.
The case for CASE
Flooring, running tracks, playgrounds, and protective coating are CASE applications for polyurethane. Myriads of niche applications help polyurethanes grow into more and more innovative subsectors.
Case products account for approximately 30 percent of polyurethane consumed in Europe, but only 20 percent in North America. There is plenty of growth for us to see here as we continue to invent and innovate and learn from the European users. In the European case market, chemical suppliers such as Dow, BASF, Covestro, and Huntsman have been involved in a number of systems house acquisitions. These have spurred further growth and investment in technology.
Specific drivers within the case market are ongoing preference for environmentally sustainable products. Additionally, increased regulations present opportunities in some applications.
Spray foam insulation is a very strong in the North American market. It is increasingly replacing traditional insulation in construction and now accounts in the U.S. for over 40 percent of the market.
The industry drivers which have created this fast-growing business for us are: new residential construction; residential remodeling; and, replacing other insulating materials like fiberglass and cellulose.
In addition, the materials have advantageous cost-in-use performance especially, the water-blown polyurethane spray foam. This has better cost-in-performance than almost any other material and means it will keep growing in the insulation market.
One of the largest challenges we have as an industry is the shortage of toluene diisocyanate.
A tale of mishaps
Through a series of mishaps in our industry, and because the newer plants are of very high scale, production has been disrupted. This had a big effect in terms of availability and pricing. Shortages which were supposed to last 2-3 months have lasted 18 months. To some degree, these shortages have dampened growth in some segments.
Major operating issues, and the delayed start-up of both Sadara and the BASF plant in Germany have really created the shortages. We do feel that new capacity will come on stream and that this will gradually correct itself, barring other unforeseen surprises.
For MDI the trend is similar to TDI. With new capacity coming on stream in 2019 and the demand growth for MDI-based polyurethanes far exceeding that of TDI. There is a constant need for new capacity. The suppliers understand this, and building bigger, better plants, more efficient plants that will help our industry as we have the feedstock to continue to grow around the world.
Let me say a few words about trade rules. The chemical industry in the U.S and China are in the line of fire between the two countries. China is the third-largest country for chemical exports behind Canada and Mexico. It is important to know that exports of chemicals to China total $50.1 billion while imports from China totaled $80.2 billion.
In June, the U.S. reset the tariffs and announced a new 25 percent tariff on polyurethanes, PVC and lubricating oils. For now, it is hard to see what the outcome will be, but there are a few possible scenarios clearly this will change shipping routes.
The markets are very efficient, and will find a way round obstacles, although this will increase costs. But, in one scenario this will increase costs and force a delay or abandonment of millions of dollars of chemical facilities investment in regions because the supply would not be at the right location. The major risk of tariff increases may also lead to broader trade wars.
But, the North American polyurethane foam industry it is blessed with low cost feedstocks, a history of innovation and large-scale. That combination promises to help us to grow for decades to come.