Deja vu in 2022?: ARPM predicts rubber industry's year ahead

INDIANAPOLIS—"Meet the new boss, same as the old boss."

Rubber processors are not likely to be fooled again in 2022 by market uncertainty, though the realization that supply chain issues, labor market tightness and pricing volatility in the coming year may not be much different from 2021 is cause for both concern and "cautious optimism."

The Association for Rubber Products Manufacturers will host its annual State of the Rubber Industry Jan. 27, virtually, during a webinar at arpminc.com. This year's report is based, in part, on the responses of 100 executives and CEOs (both ARPM members and non-members) and includes essential demographics, analytics and trends on which processors can build an intelligent economic outlook for this year and beyond.

Tony Robinson, analytics director with ARPM, talked with Rubber News for a sneak peek at the upcoming report, which collected responses from the beginning of December 2021 through Jan. 7.

"2021 was a struggle for a lot of processors," Robinson said. "They were seeing a ton of demand, just skyrocketing demand, and for many, sales rose like they never had before. But backlogs rose as well, as processors could not get their hands on raw materials, components or a consistent labor force.

"So, they had all this room to grow and were pulled down by a lack of labor and solid supply chain."

That said, the non-tire rubber product world is seeing the same story heading into 2022, with great expectations for the bottom line and blossoming opportunities for new customers—if they can find the employees and ways to decrease raw material costs.

"Freight costs for truck and shipping containers are huge, huge issues for processors as well," Robinson said. "This plays in to the long lead times and costs for raw materials."

The annual ARPM forecast is based on information gleaned in the previous fiscal year between quarters three and four—and the resulting momentum that can be created in that end-of-year push.

Robinson said the upcoming survey (on which the State of the Industry will be based) reflects this market uncertainty, with only 16 percent of respondents saying the headwinds will ease by the second quarter of this year; and 40 percent saying that a full market recovery will not be realized until at least 2023.

About 56 percent of processors stated in the upcoming report that they are having difficulty in securing raw materials.

The survey also tracked machine components, including fasteners, electronic components and aluminum—none of which were as affected as raw materials.

However, the microchip shortage is having an effect on everyone, Robinson said, as automotive and transportation are by far the largest markets for non-tire rubber processors (at about 31 percent of the entire finished rubber product market).

"There is uncertainty, especially in automotive," Robinson said. "Automotive is kind of haywire right now. We need to increase domestic production of microchips or they are going to be like gold moving forward."

However, this space, like others such as mining, oil and gas, agriculture, and food and beverage, is expected to improve through 2022.

Tom Rimel, CEO of Stockwell Elastomerics Inc., predicts that supply chain challenges will continue "well into 2022," although the Philadelphia-based firm is seeing positive signs coming out of 2021. Stockwell Elastomerics is a member of ARPM.

"Like many organizations, we are still in a position to hire more employees than are currently available," Rimel said. "We are focusing on engagement and the wellness of our team—keeping everyone informed in real time as to what is happening at Stockwell and to our customers. We will continue our investment in technology and continuous improvement to deliver more product faster to our customers."

Rimel noted that many of Stockwell's customers are doing well, witnessing strong demand and a healthy balance in backlogs. And Stockwell appears to be in the minority of companies bucking the tight labor market problem, adding 15 new employees in 2021.

"I think that the chaos has presented opportunities for us to work together better internally and with our customers," he said. "Unpredictable events have enabled us to increase our flexibility and creativity within our company."

Rimel added that most of the markets served by Stockwell—the company has major applications in silicone—are performing well, and the ones that are not could open back up again in 2022.

"We believe that the specialty electronics markets—the ones most impacted by the supply chain challenges—will continue to improve through 2022 based on the availability of other materials they use for production," Rimel said.

The ARPM report sheds light on other major industry trends outside of hiring and retention, supply chain difficulties and pricing volatility.

About 54 percent of respondents said their backlog had increased "or significantly increased," while about 32 percent of processors said their backlog stayed the same. About 14 percent reported a "decrease or significant decrease," Robinson said.

"This speaks to the momentum coming out of the year," he said. "There is potential here, but 'potential' is the key word."

Respondents also were asked about foreign competitors and whether they were gaining or losing customers to such influence. About 33 percent of domestic suppliers said they gained business from foreign suppliers, while around 63 percent "neither gained nor lost business."

"It's good to see that business is coming back to the domestic side," Robinson said, adding that 66 percent of processors reported that they are moderately or aggressively looking for domestic rather than foreign suppliers, though duties and tariffs on the regulatory side clearly play into this push.

ARPM also tracked lead times for general tooling, and Robinson reported that there was no significant difference in domestic and foreign prices, as lead times and pricing are increasing across the board in this realm.

Perhaps the most ambiguous of all the survey results were the responses to which markets were the "most optimistic" and which were the "least optimistic" moving forward, as responses were subjective depending on the processor.

"This really is a kind of loaded question, as processor opinions vary greatly from industry to industry," Robinson said. "Automotive, depending on who you are serving, can either be great or horrible."

As a result, automotive simultaneously was considered both the second-most optimistic space and the least optimistic market. Aerospace came in second, Robinson said, in the "least optimistic" category.

"Really, this is not too much different from last year," Robinson said. "I would say the rubber processing industry is cautiously optimistic overall. There is a lot of potential here and for many it could be a record year.

"But this comes with the caveat that they have to get their hands on a steady supply chain and enough workers to make it happen. If customer demand can be met, it will be a record year for many."

Regulations coming out of Washington often are unpredictable and always impactful.

Many still believe that duties and tariffs will be the largest area of concern moving forward.

The U.S. and the European Union reached an interim agreement in November to amend the tariff structures on U.S. aluminum and steel imports from the EU, a move that many in the industry see as relief for domestic manufacturers and a platform from which carbon emissions can be addressed.

The new tariff structure went into effect Jan. 1.

While the 10-percent aluminum and 25-percent steel tariffs remain in place under Section 232 of the 1962 Trade Expansion Act, each will revert in 2022 to a tariff-rate quota based on historical amounts of aluminum and steel that entered the U.S. from the EU in recent years.

This should provide relief for American companies, according to the U.S. Department of Commerce.

Others say the regulatory environment as it relates to a company's COVID vaccination status will have the greatest effect on the rubber processing industry.

"Vaccination is a high priority for processors, in the sense that they overwhelmingly do not want it to be mandated," Robinson said. "The fact that the Supreme Court recently blocked the OSHA mandates is good news for processors.

"They just do not want it. There are legal gray areas with HIPPA, which they believe will be huge headaches. Who pays for the test and the paperwork? Insurance companies? The company?"

There also likely will be an increase in sustainability legislation as it relates to the reduction of greenhouse gases and CO2 emissions. Rejoining the Paris Climate Agreement, for instance, will have an enormous impact on the non-tire industry.

Robinson said no sustainability questions have been included in the ARPM forecast to date, though that could change next year.

Specifically in the fluoroelastomer market, there are tightening emission regulations as the demand for high performance and low-permeability materials increases.

Uncertainty in regulation changes, corporate tax rates and environmental policies make it hard to predict how they will impact business.

In addition, AV and EV technology will alter production for non-tire elastomer processors, as the burgeoning industries are expected to be component-rich.

Akron-based Smithers, a testing and market report firm, predicted a 3.5 percent CAGR for the rubber product industry to 2023, which equates to 18.8 million tons produced for the non-tire elastomer industry by that time, in its "The Future of Natural and Synthetic Rubber for Non-Tire Applications to 2023" report.

Smithers said the biggest development driver of non-tire elastomers is the search for increased performance in heat and chemical resistance, as well as compression set—and any breakthroughs in 2022 are expected to be the result of natural rubber processing developments, the development of the competitive landscape, improved manufacturing and process methods, and government regulations.