Capacity relief still far off for silicone

RAVENNA, Ohio—Silicone supply in the U.S. is still strained, and isn't likely to improve within the next two years, according to Erick Sharp, CEO and president of Ace Products and Consulting L.L.C.

Sharp described the challenges facing the overall market in part of Ace's free "Silicone Market Analysis" class offered through its iLearn Innovation Institute.

Some of those difficulties go back to 2017, as silicone precursor demand was strongly growing in Asia, because of competition to make silicone materials, he said. As that demand increased, events including regulatory factors, catastrophic events and capital expenditure demands came together to make "a perfect storm" in the middle of 2017.

At the time, the market saw large gains through automotive and construction advances as end users became more aware of the heat stability properties of silicone, he said. Liquid silicone rubber was another area of rapid growth, particularly in Asia. Medical applications also drove the demand of precursors, though they didn't cover the majority of the volume. Non-elastomer sectors also saw growth, such as beauty and health care, and coatings.

Sharp said the Asian market had some excess going into 2017, but constraints hit by about the middle of the year. One of those constraints was regulatory, as the Chinese Ministry of Ecology and Environment started to increase control of pollutants after global pressure, and audits began happening at silicone plants.

"For them to audit a silicone plant, it wasn't something they could do while the plant is operating. They had to stall the plant to be able to come in, take the sampling they needed to take in all the different sections and do the analysis," Sharp said. "Operational rates went from 100 percent to down around 50 percent, with some of them at 30 percent capacity during the entire second half of 2017."

Abatements for some of those audits went into 2018, as ramping back up to capacity took additional time, with China's supply then still running at 50-75 percent capacity, Sharp said. As Asian buyers became willing to pay higher prices for silicone, the European suppliers swung its supply there to support demand.

Then, as monomer supply became tight for North America, equipment breakdowns hit, taking regional operational rates down for up to two months. Another North American producer dealt with labor strikes, and the issues in conjunction as the European market focused on Asia created a supply gap in North America, Sharp said.

"Suddenly we have two producers in North America, one had a catastrophic event, one had labor strikes. Both are running at about 50 percent capacity and we're getting nothing from Europe," Sharp said.

As those factors played out through the year, it reached the point for scheduled maintenance shutdowns, he said. While some shutdowns were able to be opted out of, the fear of another catastrophe pushed others through. Continuous growth was still happening across silicone markets worldwide.

"Leading into all of these events, we were probably hitting about 75 percent capacity of what was out there in the market at that time," Sharp said. "When you hit 75 percent, and you see that you're on continuous growth, and there's no reason to assume there's going to be any plateauing or dropping off, you know you're going to tap out and you're going to need to add capacity at some point."

Expansion announcements

As the year went on, capital expansion announcements began to show up from several silicone suppliers, but most left details vague, Sharp said.

"This is September 2018, so it's still a hot time. People were still freaking out about supply," Sharp said. "It basically says, 'We're going to add capacity. We don't know where. We don't know what. We don't know how much. We don't know when. But we want to let you guys know that capacity's coming, so everybody doesn't get a little bit crazy and go out there and start switching away from silicone to other things.' "

Capacity announcements were meant to help stabilize the market to hold over customers struggling under the reductions, Sharp said. Some specified upstream production, meaning an increase in monomer production, where increases in downstream capacity meant a wider range of products once more silicone monomer became available.

Dow announced an expansion to invest both in upstream and downstream production. Currently, the only official announcement for upstream monomer production has been at Dow's Chinese operations.

"Right now, there hasn't been anything upstream announced for North America yet, but there has been downstream infrastructure improvements announced here in North America," he said. "There's probably still going to be more to come with these announcements, but these are what's out there right now."

Wacker Chemie A.G.'s initial announcement was also vague, that the company would be adding silicone without naming the continent where the supply would be added. In later releases, Wacker said downstream improvements would be taking place at its Adrian, Mich., facility, Sharp said. Upstream improvements have been announced for China, but information is scarce other than that's where the additional volume is going to go. Monomer expansion could also be part of Wacker's Charleston, Tenn., facility that recently began making fumed silica, or its Burghausen, Germany, site where more space has opened up.

Momentive Performance Materials Inc. announced that it will be expanding its facility in China, as well as two other smaller Chinese joint ventures that continue to develop downstream production, Sharp said. Elkem Silicones said it would be expanding its product offerings.

Shin-Etsu Chemical Co. said it would be boosting its silicone output, which is to say "they're going to push the pedal to the ground a little bit harder on what they have right now," Sharp said. It has invested in downstream operations in North America, including its Akron facility, and started possible planning on upstream improvements in Japan.

Two of the local players in the silicone market, Hoshine Silicon Industry Co. Ltd. and Dongyue Group Co. Ltd., have both announced capacity increases, Sharp said. Dongyue started construction on its expansion in the first quarter of 2018.

"They actually have quite a bit of construction. They got past the planning stages, beyond putting a shovel in the ground," Sharp said. "They're the furthest along of anybody that's announced capacity expansions right now. Hoshine is still in the planning stages."

While several expansions have been announced, the details surrounding them means actual capacity changes are still some distance off, Sharp said.

He gave the example that if "Sharp Silicones" said it would be adding silicone capacity, it would take a year for planning, engineering, design, stability and setup. Then it would take another year to build the plant, and another six months to optimize the plant once it gets moving to actually get product to sell. That puts the soonest new product reaching the market between 2-3 years away.

"I over-analyze a lot of these press releases because of the wording that gets in there," he said. "But when they start saying things about how they're looking at expanding and evaluating where to put it—if they're still evaluating where to put it, they're not super far along on the engineering planning. Unless there's a shovel in the ground, you're still 2-3 years out. And there's not a whole lot of shovels in the ground right now."

Merger activity

Further complicating the addition of capacity are two major transitions for silicone producers, Dow and Momentive, Sharp said.

The good side of the DowDuPont merger is that when the separation completes, it could mean more focus again on the core parts of the individual businesses, he said.

"Right now, there's just so much going on and nobody knows what's going where," he said. "There's just a lot of confusion."

The downside of this part of the separation will be that the company's silicone sector, what used to be Dow Corning, will end up in different segments, as health care is going to DuPont, and regular Dow product lines will remain at Dow, Sharp said.

"The problem is that there's only two plants, and they're all going to be operating at one unit," he said. "There's now going to be more than one company that actually has the commercial and business side of those plants. It'll be interesting to see who wins and how do you manage when you have one asset but two companies that use that one asset."

Another big shakeup for the industry was the purchase of Momentive by a partnership of three South Korean firms, including KCC Corp., Wonik QnC Corp. and SJL Partners L.L.C., he said. In recent years, Momentive went through bankruptcy to deal with debt, and also ran into issues with labor unions and environmental conditions at the company's Waterford, N.Y., facility. He said that Momentive is more than three times the size of KCC, which would stretch its financial and labor resources thin. KCC also assumed the outstanding labor and environmental factors for Momentive in the $3 billion deal. Acting at about one-third the size of Momentive, KCC is having to be extremely cautious with its new business.

"They're up against the ropes right from the beginning," he said. "There's definitely not going to be $500 million investments taking place."

KCC will likely start looking for places for consolidation and reduction of costs, probably in avenues found during due diligence, rather than putting out any new money, Sharp said.

Trade war

If it weren't for the U.S.'s current trade war with China, supply would be dumping into the U.S. at aggressive prices, Sharp said. As it stands, the main tariff codes for silicone in its primary forms at 3 percent across the board. In its elastomeric form, it has no initial tariff on it. However, silicone is named on the additional tariff list, which includes a 25 percent tariff that can be stacked onto the previous 3 percent for a 28 percent increase coming into North America for Chinese monomer supply. Shipping costs have also gone up 35-40 percent compared to 2017, with congestion in Chinese ports and lack of shipping containers and vessels, and lack of truck drivers once the materials reach North America. Also on top of the duties, most buyers aren't bringing in full containers just for themselves, so some varying warehousing costs are likely added as well.

"Quite a few" customers are still in allocation for silicone supply, Sharp said. "When you're on allocation and you have a product you can make, sometimes we're willing to pay more to go and get that material."

But getting approval for additional cost and dealing with qualifying a source is difficult, especially if a customer is comparing to a domestic source that will eventually get supply out once more capacity is online, he said.

"It make you a little more hesitant and delays some of that," he said. "But people that are delaying are in the hopes that those allocations will go away domestically within the next year. Which we talked about earlier, it takes 2-3 years for new capacity to come on."