Silicone industry regresses due to high demand, low capacity

The global silicone market is experiencing deja vu, reminiscent of 2017-18, with tight supply, soaring prices and escalating demand as the Asia-Pacific and North American markets open up following the pandemic and upstream manufacturers of silicone monomers lag in capacity.

With Asia serving as the bellwether region—more than half of the world's silicone usage now is in the Asia-Pacific space, with China as the world's largest consumer—trends there tend to reach North America within a couple months. In Asia, the average price of silicone was up more than 50 percent year-over-year this past March and more than 25 percent year-over-year for February 2021, according to Erick Sharp, who monitors the silicone market as president of Ace Products and Consulting L.L.C., based in Ravenna, Ohio.

And these spikes will continue, experts say, until capital expansions are completed and more monomer capacity is created by the largest producers, including Dow, Wacker Chemie A.G., Momentive, Elkem and Shin-Etsu Chemical Co. Ltd.

"Similar to 2017-18, there isn't just one single thing affecting the market," Sharp said. "It is a combination of factors. Other than a short dip during the peak of the pandemic shutdown, demand of silicone has not let up since the 2017-18 era. During that crunch, there were a lot of announcements on expansions, but very few of those have been completed or even started yet. This means the market has very little buffer."

The "perfect storm" occurring in the silicone market today may be a combination of events, but unlike the unrest seen in 2017-18 a global pandemic has been added to the existing dearth in capacity and rising demand, according to Scott Kearns, principal partner at Santa Fe Springs, Calif.-based ElastaPro Silicone Sheeting L.L.C.

ElastaPro is a smaller company in terms of fabrication personnel count, but a medium- to larger-sized consumer and processor of silicone rubber.

"The current supply situation is being driven by the market playing catch-up for nine months of a significant slow down—all at the same time that silicone producers are struggling with personnel, equipment and critical ancillary products that are in short supply," Kearns said. "All of this together has created a perfect storm of constrained supply.

"This is not a single silicone producer issue, this is a global issue affecting all silicone suppliers as demand is up, costs are up and they are playing catch-up."

Silicone is used in a remarkable array of products, often selected for its wide temperature thresholds, chemical resistance, biocompatibility and low compression set, crucial for air-tight gaskets and seals in harsh environments, such as aerospace and construction.

The compound is used in food contact and medical procedures, as it is highly inert and stable.

Experts predict that demand for silicone will continue to grow over the next few years. Many of the key product sectors of silicone—including automotive, commercial and military aviation, medical, construction (which only will increase if the proposed $1.2 trillion infrastructure bill in the U.S. passes), household goods and consumables—are set for strong growth.

The only way to level the market, some say, is to increase capacity and streamline logistics, which also remain huge problems since, in many cases, capacity is waiting for freight space at oceanic ports.

At $25 million in revenue, Philadelphia, Pa.-based Stockwell Elastomerics Inc. is a small but growing company that has increased its facilities footprint by 30 percent in the last four years. In the last three months, Stockwell has added 10 percent to its work force despite a tight labor market.

And it is growing in revenue by 12 percent year-over-year—mostly in silicone rubber products, according to William Stockwell, chairman and chief technical officer.

"Liquid silicone is in very tight supply," Stockwell said. "Many of the smaller players in the market like Stockwell Elastomerics are facing allocations or excessive lead times—perhaps as bad as it was in 2018.

"I missed the signals on this one. One of our major suppliers offered cost decreases in the fourth quarter of 2020. Then by February, they were no longer accepting or acknowledging our orders."

Stockwell said all of the company's material suppliers have increased costs, some with notification, others without. Stockwell Elastomerics is being forced to pass on some of these cost increases to customers.

"We are at risk of failing to meet our commitments to some major customers on molding critical components for defense, medical and technology equipment applications," he said. "We are actively working to get an alternative supplier qualified on many of these applications."

A global supply problem

As China opens back up after the pandemic and demand increases in the world's largest economy once again, the North American markets have seen supply constraints, with customers being allocated and silicone prices skyrocketing.

Asia-Pacific is seeing the same situation, Sharp said.

"In November 2020, prices spiked quickly in Asia," he said. "There was a small reprieve in January (2021) before trending back up again. The tightness in Asia was a combination of pandemic recovery, a major silicone monomer producer being down for an extended period and scheduled maintenance turnaround at other producers."

Specifically, a Dow/Wacker joint venture operation in China had some extended downtime, a factor in some of the constriction there.

In fact, Sharp said all the major producers have experienced delays on critical raw materials such as fumed silica, which in North America was hampered by a Wacker facility in Tennessee going offline for an extended period to perform critical improvements.

Since Dow and Momentive are the only two producers that manufacture the monomer in North America (it is produced overwhelmingly in Asia), this makes the monomer supply on this continent reliant upon imports.

"Getting more domestic capacity for silicone monomer would be helpful in reducing the risk of volatility in North America," Sharp said. "Obviously we are seeing massive logistical issues across all markets and industries. Once again we have a market that is tapped on capacity and suddenly some of that capacity is delayed on the ocean or sitting at a producer waiting for a container."

Given the expected sharp growth in construction, demand is expected to grow in the second half of the year.

"Silicone is a popular selection for gaskets in commercial infrastructure," Sharp said. "The proposed infrastructure bill being discussed in government right now would quickly accelerate this demand."

ElastaPro's silicone sheeting has applications in many markets where transportation, health care and consumer goods drive demand, Kearns said.

North America is facing a pivotal time, he said, as domestic silicone producers consider "reinvestment economics" in adding capacity to silicone rubber production, at the same time that they have other potential uses for capital and feedstock that may present more lucrative margins than silicone rubber.

Moreover, China continues to invest heavily in basic silicone production and finishing, while U.S. producers are hedging against creating overcapacity.

"The challenge is the Chinese are investing and apparently happy with their return on investment, possibly due to subsidy or lower actual costs, while North American fabricators are faced with the question of paying even higher prices to support domestic reinvestment," Kearns said.

Kearns called the current situation "deja vu all over again" with 2018. What appeared to be a blip on the radar, with relatively immediate shortages and challenges, has turned out to be a much larger, and lasting, issue.

"Many of the major producers are placing customers on allocation or simply not allowing them to purchase material until the manufacturers can catch up with their existing backlog," he said. "It's yet again another wake-up call that we must have multiple, qualified sourcing options to mitigate supply challenges and assure consistent supply to our customers."

Stockwell noted that LSR injection molding is a significant part of his business as it deals with "severe shortages" in the material. Stockwell Elastomerics also fabricates silicone foam materials that are cast from a liquid silicone base—and he has concerns about the ongoing availability of that material.

However, HCR (high consistency or gum-base silicone) used to produce closed-cell silicone rubber and solid silicone rubber appears to be "in ample supply," Stockwell said.

"From my discussions with major suppliers, attempts to increase capacity in the first quarter of 2021 ran up against shipping logistics challenges, shortages of steel drum containers, plastic wrapping and shipping supplies—let alone hiring additional production staff," he said. "Thankfully our suppliers of gum-base silicone products ... that support our compression molding and fabricating businesses—such as platinum-cure HCR and fluorosilicones—are managing their way through this.

"So far anyway."

Reasons for optimism

According to the IMARC Group, a research firm with North American offices in Wyoming, the global silicones market reached a value of between $14 billion and $15 billion in 2020.

Looking ahead, the group expects the global silicones market to exhibit moderate growth during the next five years, with market volume projected to reach 2.9 million metric tons by 2025 and expanding at a CAGR of 4.8 percent between 2020 and 2025. The silicone industry could reach between $23 billion and $24 billion globally by 2025.

And with that, all is not gloom and doom in the silicone industry.

"There is potential for very strong growth in the silicone industry," Sharp said. "The main thing that will hinder that growth will be lack of supply."

Kearns said that although "all geographies are hot right now," the market will right itself—the question is when, and at what price point.

"It's looking more and more to be quarter three or four, then we'd expect demand to smooth out and ancillary products to catch up to the demand," Kearns said. "At that point, we can expect an easing of price along with greater availability and competition. What we are experiencing in 2021 will pass."

He added that current demand levels for silicone are "not significantly higher than they were before COVID-19 (other than demand for health care elastomers)."

"Therefore, the major suppliers are simply playing catch-up rather than trying to add significant capacity," he said. "These suppliers do a great job at managing flow, but the current situation is like a long and heavy train. Once stopped, it takes a while for everything to start moving again."

And though William Stockwell remains concerned about supply for the remainder of the cycle, silicone demand will continue to increase through 2022.

"Thankfully we are privately held and independent, so we intentionally keep high levels of raw materials to support our rapid response customer servicing model," Stockwell said. "But the current supply chain situation has impacted this position during the past few months. We have seen average lead times for silicones increase from two to four weeks to eight to 20 weeks.

"We continue to work with our strategic material partners to reduce the impact on our customers."

He said any over-purchasing that occurs will need to be righted as capacity catches back up with demand—and logistical issues need to be resolved.

But silicone rubber remains a versatile elastomer that is specified by designers in most of the industrial sectors in which Stockwell Elastomerics participates.

"We see demand increasing steadily," he said. "The technology sector applications where we focus our business continue to generate strong opportunities for growth.

"But the major silicone providers will need to be ready. Up until recent events, the availability has helped to outweigh objections over the relative higher cost compared with other elastomers."