Economic recovery comes into focus for ARPM

INDIANAPOLIS—As the non-tire industry turns the page on a chaotic 2020, the challenges posed by 2021 remain similar and numerous—but not insurmountable, given the economic tail winds generated in the fourth quarter of last year.

The uncertainty brought by the coronavirus pandemic remains top of mind for processors, as does the hiring and retainment of employees. The availability and cost of raw materials also remains a top concern for non-tire elastomer businesses, according to the Association for Rubber Products Manufacturers, based in Indianapolis.

"One of our biggest concerns through all of this has been the struggles some companies are having keeping people employed as well as keeping people safe," said Michael Shaul, president of Granger, Ind.-based QPoly L.L.C., a producer of fluoroelastomers. "It's been such a huge transition, and most people have done a great job making changes and taking the proper steps, but we continue to pray that the people make it through all this without too much suffering."

Moving forward, the issues of concern for Eagle Elastomer Inc. of Peninsula, Ohio, are similar, according to Neil McHale, vice president of operations for the custom mixer of fluoroelastomer compounds.

"Employee health, sales growth, managing expenses and a return to pre-COVID operations are the main concerns for 2021," McHale said. "We will continue to have reduced travel and more video conferencing, with changes to production shifts, and we plan to maintain the ability to work remotely when necessary. We will maintain current safety and hygiene protocols."

Balancing these continuing safety concerns is economic optimism, as already many rubber processors are witnessing some form of economic recovery thanks to growth trends that began last year and are expected to carry through this year.

"Nearly every segment except for medical was negatively impacted by the pandemic," said Tony Robinson, analytics director for ARPM. "Automotive took an especially hard hit. However, after comparing the state of the rubber industry from March 2020 to December 2020, every industry has made a significant if not complete recovery. Expectations for 2021 are very positive, as fourth quarter production was record-breaking for many rubber companies."

According to Robinson, the automotive and transportation sector—by far the largest market segment for non-tire elastomers—still is lagging behind other segments in production. However, this space, like others such as mining, oil and gas, agriculture, and food and beverage, is expected to improve through 2021. Many automotive companies have said they believe the industry will return to normal by the start of the third quarter of 2021.

"We have seen a slow and steady increase in quarter three and quarter four of 2020, and forecasts seem to indicate that we'll continue to see a continued rebound into the next two quarters," Shaul said. "For us, we saw the biggest drop in the automotive sector, which also seems to be the slowest rebounding segment for us.

"The other thing that we're really seeing right now, which is typical in a slowdown, is companies looking at cost reduction programs and new suppliers to help them stay competitive and to help them aggressively quote new products/markets for them."

McHale said Eagle saw a "nice improvement in December 2020, however October and November were slow."

"Most of our customers are still lagging," he said.

The final months of 2020 provided a significant boost to America's rubber processing sector, according to the most recent business benchmarks published by ARPM. Markers indicate increased production levels, with an increasing amount of companies projected to meet their revenue goals, according to the report.

And Robinson said a majority of processors are looking to hire employees in the new year.

"Another indicator of improved momentum as the rubber sector transitions to 2021 is the increased expectation of new employee hiring," Robinson said.

In September, he said, 44 percent of processors sought to expand their work force, while 16 percent of suppliers expected to make layoffs. In December, 54 percent of processors said they were looking to hire, with only 4 percent expected to lay people off.

"If this trend continues, it is likely to see nearly 90 percent of processors at full operations by the end of the second quarter in 2021," he said. "Despite this end-of-year momentum, however, 2020 clearly left a mark, as the majority of processors do not expect a return to normalcy until after the first quarter of 2021."

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

Non-tire automotive and transportation applications will continue to represent the largest share of the non-tire space, at about 31 percent in 2023. Results of ARPM's September Pulse Report indicate that just 24 percent of processors were on target with revenue forecasts for 2020. However, by December, that percentage leaped to 40 percent as the flood gates of orders opened from many automotive OEMs that had seen shutdowns or supply line disruptions, according to ARPM.

"While the global non-tire elastomer market is considerably smaller than the global tire market, it is far broader in both the number and the type of applications," Smithers said in the report. "While tire applications require a relatively small range of rubbers to execute the needs of the tire-producing industries, the non-tire industry is characterized by a wide number of elastomers currently in use, many of which find no place in the production of tires."

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 2021 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.

Beltway regulations, implications
Regulations coming out of Washington can be ambiguous and unpredictable, but they are always impactful.

QPoly's Shaul said tariffs will be the "largest area of uncertainty going forward."

"I think this could be a challenge this year with a lot of unknowns on price stability and tariffs from overseas as well as supply concerns if there are any major impacts in the market," he said.

There also likely will be sustainability issues and related legislation as they relate to the reduction of greenhouse gases and CO2 emissions. Rejoining the Paris Climate Agreement, for instance, will impact the non-tire industry.

"Specifically in the fluoroelastomer market, we see tightening emission regulations being a positive as the demand for high performance and low permeability materials increases," Shaul said. "The Biden administration seems very interested in supporting business and the economy which should help us all even out the short term."

McHale said the effects of a new administration on overall industry policy are difficult to predict.

"Not knowing what changes to regulations, corporate tax rates and environmental policies might take place, it is hard to predict how they will impact business," he said. "One would suspect there would be a return to some of the policies from the previous administration. We will have to see how the stimulus affects inflation as well.

"A larger concern for us right now is getting through the COVID pandemic ... and how well that is managed (on a national level)."

McHale noted that AV and EV technology "has the potential to have a big impact" on the non-tire elastomer world, as the industries are expected to be component-rich.

"We continue to monitor new technologies for both opportunities and threats," McHale said.

Given the unpredictable nature of Washington policy, ARPM's Robinson said the positive economic trend is welcome moving forward.

"ARPM fully expects this positive trend to continue as the economy opens back up and the COVID-19 vaccines are distributed across the country," Robinson said. "However, the manufacturing community has learned an important lesson in 2020 that will stick with them for a long time, as shown by their 2021 expectations: Nothing is certain, and always be prepared for change."