Silicone supply remains tight; Wacker force majeure adds global capacity issues

The declaration of force majeure for a Wacker Chemie A.G. high consistency rubber silicone product line at its factory in Burghausen, Germany, in the first week of January was the starting point of another year marked with tenuous silicone supply.

From suppliers to producers, companies spent 2018 facing silicone shortages and allocations with some improvement over the previous year, and while there is some light at the end of the tunnel, it's likely still a few years away, industry professionals said.

The supply situation differs between those processing liquid silicone rubber and those making HCR silicone goods, said John Timmerman, vice president of sales and marketing at Starlim North America Corp., a producer of LSR molded goods based in London, Ontario.

"It is still very tight and, for those users who have well-managed supply chains and good communication with their customers and suppliers, the situation has been manageable for LSRs," Timmerman said.

For HCR silicone, recent market developments such as the Wacker force majeure announcement have taken a market already in short supply and "made it a disaster for many users of HCR silicone," he said.

The overall supply situation for both buyers and sellers is "a mess," said Len Rogers, supply chain manager, silicone, metal and metal fabrication, for Freudenberg-NOK.

"There's shortages everywhere in the market," Rogers said. "Most of those shortages, in our opinion, stem from the basic raw material siloxane, and there's been no investment, no basic plants, no basic assets added in the past decade by any of the major suppliers. I think that's coming to fruition as demand's grown, where the manufacturers are making some hard choices in where they supply and who they supply."

While the industry is still seeing a fair amount of allocations, there are fewer in general, said Erick Sharp, president and CEO of Ace Products and Consulting L.L.C., based in Ravenna, Ohio. But the fact that those allocations are still in place shows that the industry still hasn't gotten back to a balance point.

"There's still obsoleted product lines, and this force majeure shows that it's hand-to-mouth still," he said. "Nobody is necessarily getting everything they need. We still have customer bases trying to offset things so they can maintain supply."

Companies are still being throttled back on additional supply or coming up short on necessary product, Sharp said. Some of that rationing loosened last year, but many products that were taken off the market in that time frame have yet to return.

Some companies are seeing a more optimistic picture coming away from 2018, seeing the year as a low point. Rick Rey, president of Niles, Mich.-based Specialty Products & Polymers Inc., said the current state of supply remains the same as 2018, though his suppliers expect some improvement in the new year.

Pradnya Parulekar, vice president of global business development for silicone and polymer medical product manufacturer Raumedic Group, said she believes they've seen the worst of it.

"We anticipate things will get better over the next 18 months," Parulekar said. "The raw material suppliers are actively implementing plans to ameliorate the shortages. These include infrastructure upgrades, efficiency improvements and negotiations with their own suppliers."

The biggest market force affecting the silicone market is just the overall availability of raw supply, Rogers said. Momentive Performance Materials Inc.'s Leverkusen, Germany, facility shut down, which took 80,000 tons of siloxane out of the market.

"Depending on who you talk to, some estimates are roughly 10 percent of global capacity for siloxane have been taken offline since 2010. That's not good," Rogers said.

Timmerman said the shortage was caused by the constant growth of silicone polymer applications greater than GDP growth in most continents, without a corresponding investment in capacity following the financial crisis in 2008-09.

Though demand for silicone had been increasing quickly, the shortages have been one cause in a stagnated past year, Sharp said.

"It hasn't necessarily moved to decrease much where people are pulling a whole lot away from silicone," Sharp said. "Demand has kind of been neutral overall. Nobody's pushing new things."

Of the silicone markets, the HCR market in general is where the cuts in production have hurt the most, Rogers said.

Recent investment

In the past year, several silicone manufacturers announced investments in silicone assets globally. Wacker is planning to gradually raise its capacities by about 40,000 metric tons each year through 2021, with about $114 million earmarked for the investment, according to a Wacker spokesman.

"Our strategy is to boost the availability of all HCR, LSR and room temperature vulcanizing silicone rubber specialties in our portfolio," he said.

Dow Chemical Co. is planning to invest in its upstream and downstream silicones business, with a series of incremental debottlenecking improvements and other initiatives during the next three years. Shin-Etsu Chemical Co. Ltd. is investing $977 million in its silicone operations during the next two to three years.

While major suppliers are investing, getting a lock on when those investments are going to be able to start providing some relief to the market is a matter of debate for those inside the industry.

"It is a 12-24 month lead time from when investment begins to when it hits the market, so it will not help much in 2019," Paul DiCaprio, president of Specialty Silicone Products Inc. in Ballston Spa, N.Y., said in an email.

William Stockwell, president of Stockwell Elastomerics Inc., a silicone molder and fabricator in Philadelphia, said he isn't expecting capacity increases until at least the third quarter of 2019.

"That's going to make for more challenges ahead," Stockwell said. "We've got to get this thing figured out."

Debottlenecking efforts can help, but in general, "those are long-term solutions. In the upcoming year, I don't see a lot of relief in sight," Rogers said. "I think somebody needs to build a new basic plant. Somebody's got to make that step."

Timmerman said there is no simple answer to silicone suppliers effectively addressing capacity concerns.

"It takes time and considerable capital to resolve this global shortage," Timmerman said. "There is not a quick and easy solution. I think the boards and CEOs of the silicone polymer producers have a difficult challenge to make the major decisions required to support the silicone market over the long term."

Rising prices

Climbing prices also have been a complication for the silicone market, as supply has dropped off.

"We've seen some significant increases in base and gum prices, and that's global," said Donald Picard, Hexpol Compounding North America vice president of sales and marketing. "That's everybody. That's not peculiar to us. I'd be lying to you if I told you I knew the end was in sight. It may be tomorrow. It may continue for a while. I really don't know."

For SSP, prices have continued to rise between 8-15 percent, according to DiCaprio.

"That's a big worry I have. We're facing price increases from our silicone suppliers that are unprecedented—7-10 percent right now—and we've already hit our customer base with price increases over this last 15 months," Stockwell said.

Rey said there has been a large increase in the raw material pricing from his suppliers. While 3-6 percent was the norm in previous years, the price increases for 2018 were "sinful, with some going as high as 60 percent," he said. "Pricing (now) seems to have stabilized but has not gone down."

As price has fluctuated, some companies that had transitioned to silicone from other materials such as EPDM have shifted back to products that are easier to find and afford, Sharp said. The market began using more silicone because of increased performance when it was closer to the $2 per pound mark, but increases have started to price those companies out. With prices now closer to $3 per pound and above, "that's already hit that tipping point on a lot of markets to where the ones that can be moved easily have started that transition for sure," Sharp said.

The shortage has put more pressure on HCR products, so Parulekar anticipates many customers moving to LSR products both for reasons of capacity and pricing.

"Switching costs have prevented this changeover in the past; the present situation is enough to tip lots of people over the edge," she said.

The pressure will be on producers to cushion the blow to the end user, who might otherwise start looking at alternatives, Stockwell said.

"We've got to make sure we have enough capacity to be able to ensure a consistent supply and reduce the future price shocks to the marketplace," Stockwell said. "Going out to a major customer with a 10 percent cost increase, I know we'll be eating a major portion of that. We can't push that whole price increase out there. It just won't happen."

Asian opportunity

Availability of product from Asia also has been both a resource and a complication for the silicone market, with environmental restrictions continuing to cast ambiguity over the process, Sharp said. Within the last few years continuing into 2018, China's Environmental Protection Administration has cracked down on facilities facing high pollution levels, and would indiscriminately shut down plants to inspect and audit procedures and outputs. Those shutdowns could last weeks, and getting back to full capacity could take a month.

The market in Asia "took off like a rocket ship" Sharp said, driving the price of polysiloxane high enough that European producers sent product there rather than to North America.

The increased global demand, shortage of raw supply and elevated Chinese domestic consumption creates a "perfect storm" for the industry, Parulekar said.

In the last three months of 2018 and leading into the new year, the Asian market has been more soft toward silicone, Sharp said. That has been a positive for supply, with monomer prices coming down about 20 percent. That has led to some exploration in North America of at least doing qualifications for product opportunities.

"The one thing that people are hesitant about are these trade wars," Sharp said. With the initial tariffs coming in at 25 percent and currently stated at 10 percent, the uncertainty could hamper new business.

Asian suppliers know that while their price has come down some, here in North America there are companies that still have no availability whatsoever, Sharp said. So those suppliers aren't likely to drop the price to sell it in North America.

"Though, what's the cost by the time you've got freight and tariff coming in," Sharp said.

The shift in the market could open up some available supply for North American companies, but it's not likely to make much change in price, Sharp said.

"With China's economy starting to slow down, I expect a marked improvement for this year," Rey said, though talks of a trade war between the U.S. and China have been the biggest force impacting supply in the market overall. "I doubt if our suppliers will move quickly in reducing material pricing when cost/demand drops," he said.

Customer communication

In most cases, suppliers, fabricators and original equipment manufacturers have been able to come to agreements, Parulekar said. After the initial wave of adjustments, prices began to stabilize. Raumedic was able to secure guarantees for price and volume through the relationship with its raw material suppliers.

In a shortage, working with customers closely to meet future silicone product needs can help alleviate the pressure, Rogers said. Freudenberg is looking ahead with its annual operating plan and projecting its needs to the supply base to allow time to either come back early or provide other options. After about three years of allocations on silicone markets, customers are used to being more communicative about product availability and future needs, for better or worse.

"We're able to meet our current demand. It's just a lot more forward thinking, a lot more planning, a lot more conversations with your customer to make sure that everybody's needs are going to be met," Rogers said. "And your customer knows too that when they get approached, they're in a tight market, and they have to tell that same story to the people they're selling to, or to their end customer: We wish we had more material, but we don't have it."

For Hexpol, it could be a situation where it can't get enough of one material, but can offer customers something else, Picard said. It may require the customer doing some reformulations and adjustments to processes, but they can otherwise continue on pace.

"We don't just say, 'Sorry we can't get the raw materials. Have a nice day.' And then they're hung up high and dry by themselves," Picard said. "We take it seriously that we have a responsibility to help them, and we give them options. Most of the time one of them works."

Trelleborg A.B. also has been able to continue servicing its customers despite lower available silicone through close monitoring of customer demand and cooperation with strategic suppliers on forecasting and planning, a company spokeswoman said. Increased stock levels also play a part in addressing extended lead times.

When silicone became scarce, Specialty Products began building up an inventory of silicone to make certain it would be able to meet the needs of customers, Rey said.

"The negative impact for us is the fact that we buy 'what is available' out there, pushing our inventory levels up," he said. "We are sitting on an ample, maybe excess, supply we built up when the supply issue initially started last year."

Parulekar said customers and suppliers are working together to make sure there will be enough silicone on the market. "Suppliers heard loud and clear that they should avoid pushing end-users toward alternate materials," she said.

Despite the teamwork, companies continue to look for silicone supply while considering other materials, and the solution going into 2019 is likely to be more complicated, not less, Sharp said.

"Some of them, they could be believing that it's going to get better, help's on the way," he said. "Which, it is, but they just don't understand the timing involved with it. Now it's just a matter of patience. And at some point they're just going to get tired of it and not believe that it's coming next year, because it's not."