Sales up, but chemical, additives industry faces pressure on all sides

With raw material inflation, skyrocketing demand and high logistical costs dominating the performance additives and chemical market, industry suppliers and distributors have come to expect the unexpected.

While upstream companies like Houston-based Kraton Corp.; Essen, Germany-based Evonik Industries; and Cologne, Germany-based Lanxess A.G. are seeing these challenges paired with increased sales in the first half of 2021, distributors say sales could be better if demand could be met.

Availability is being constrained by exorbitant container costs and exceptional port challenges, including unforeseen anomalies like the deep freeze in the south in February, ships getting wedged sideways in the Suez Canal and other instances of freighters running into port cranes in Taiwan.

Economic drivers are impacting cost as well. For example, freighters are leaving ports immediately after offloading in the U.S., half-full, because they can make more money transporting goods back the other way.

"You had a system that already was taken to its max with the pandemic," said Joe Moran, vice president of Twinsburg, Ohio-based HB Chemicals Inc., a distributor of "everything you need to mix rubber."

"The supply chain is maxed out. You have extremely high demand, and global events—like the winter storm in Houston or the port challenges in China and across the world—have conspired to make things difficult," he said. "The system can handle a few things going wrong—already inventory was tight—but you can't continue to take on water.

"The system is taking on way too much water."

With inflationary pressures on raw materials and high logistical costs come price increases, something that most large specialty chemical companies have instituted to allay these costs.

Kraton increased price in its specialty chemical and polymer (performance additives) segments—both of which trend as crude oil costs trend—in July and again in August.

Effective Sept. 1, the company raised prices on its HSBC (hydrogenated styrenic block copolymers) to $440 per metric ton. The largest impetus for this hike came in butadiene, which was approximately 97 cents per pound in August compared to about 26 cents per pound last year, according to Gene Shiels, director of industrial relations with the 1,900-employee Kraton.

And as of Sept. 15, Kraton increased prices by between 10 and 15 percent in its crude tall oil (CTO) refinery products and related upgrades and derivatives (tall oil fatty acids and tall oil rosin products). CTO is the primary raw material for the chemical segment, although Kraton also refines crude sulfate turpentine into higher-end products such as tire enhancement additives.

"We have been putting in place a number of price increases in both segments intent on addressing raw material cost inflation, as well as inflation in transportation and logistics. And then there is the reality of a strong demand environment," Shiels told Rubber News Sept. 13. "This is the first time we have seen this type of demand environment in three years. First, it was tariffs in the second half 2019 for high-end HSBC, when sales in China were way down. ... Then it was COVID, when our tire business was down some 40-odd percent."

Other relatively recent instances of price hikes for specialty chemicals and performance additives include a Sept. 2 increase from Lanxess for its inorganic pigment products and an early July price hike from Evonik for its super-absorbent polymers.

Lanxess increased prices for iron oxide pigments "by a minimum of (about) $236 per metric ton;" for chromium oxide pigments "by a minimum of (about) $354 per metric ton;" and for ferrites "by a minimum of (about) $295 per metric ton."

In addition, Lanxess implemented a transportation cost fee, depending on the destination of the freight.

Evonik increased prices for its super-absorbant polymers by between 20 and 25 percent, the company said.

"The global COVID-19 pandemic and its effects have left traces on the chemical industry," said Evonik's Michael Kempf, head of the market segment that includes tires and mechanical rubber goods, and the silanes business line. "Many raw materials have become scarce or their availability has been shifted from one region to different regions all over the world. Massive impairment of global logistic processes and the enormous rebound in many industry segments at the beginning of 2021 added to already exceptional circumstances.

"All this has led to increasing raw material prices and logistic costs."

Still, Kempf said, Evonik has been able to meet demand.

"With a production asset footprint in all regions ... Evonik is in an ideal position to help its partners to secure security of supply," Kempf said.

Inflationary pressures

With overall demand and sales margins on the increase for many of the suppliers of chemicals and performance additives, the price hikes may seem counterintuitive.

Evonik, Kraton and Lanxess all updated their 2021 forecasts in August with improved outlooks after strong first halves. And acquisitions remain prominent.

"We have emerged out of the crisis stronger than before and have made substantial gains in the first half," said Christian Kullmann, chairman of the board of management for the 33,000-employee Evonik. "This positive dynamic will continue in the second half. Therefore, we are confident about raising our outlook."

But the costs of ocean shipping, rail and last mile, and short haul and long haul trucking have to be born out somewhere, and they are realized across the entire supply chain.

"Across the board, it is not an issue of availability for primary chain raw materials, it is an issue of cost," Shiels said. "Supply chains are working three times as hard to get stuff where it needs to go. The imbalance now is that ships get here, but they do not wait if you are not ready (with return freight) at the port itself. They turn around and head back to Asia.

"They are making more money going back and picking up more than on the back haul."

And with specific raw materials, Kraton and others have seen "extreme pressure on butadiene this year."

"Of late there has been the freeze event, the disruption with some unplanned outages, and butadiene has been very, very tight," Shiels said. "We have seen through August the increase in butadiene prices, though finally some cargo is coming this way from China and Asia.

"But overall it has been pretty brutal with butadiene."

Styrene and isoprene, other key materials for petrochemical segments, have been tight, though not nearly as constrained as butadiene.

Shiels noted that butadiene is showing signs of rebounding, and Kraton has been buoyed somewhat by the chemical segment's polyol fatty acid production.

"Just look at soybean oil ... there has been an uplift in the vegetable oil world, and our ability to provide this has been strong," he said.

He added that rosin ester tackifiers for the adhesive market, such as low-end gum rosin, continue to be constrained, as the tapping of pine and spruce trees in China continues to decrease.

"It may be up a little relative to last year, but it is down from 2018-19," Shiels said.

For Moran of HB Chemicals—a Ravago Holdings Inc. distributor with 33 employees, $150 million in annual sales and warehouses throughout the U.S., Mexico and Canada—the outlook is similar, if a bit more uncertain.

"For us, it is hard to tell what the inflationary pressures are, what is driving a lot of the transportation costs," he said. "But everyone is seeking inventory, and there is a lot of raw material pressure—and that availability is getting tighter."

HB Chemicals distributes for Evonik, and Moran said that when container rates coming from China increase from $4,000 per container to $30,000 per container, it affects everyone.

"If that is not inflation, I don't know what is," he said.

The trends toward high demand, high cost and lower availability may not be going anywhere soon, Moran said, as any opposite currents arising to push back against these challenges are a ways off.

"I don't see anything immediate," he said. "We are going to continue with lower supply than demand. Demand will remain strong. There is possible infrastructure spending coming down the pike, and I suspect this year will continue the way it started.

"Sales for everyone could be better. We would sell more if we could get it—but when that other shoe drops is anybody's guess. I think the sad part is people are getting used to it at this point—and it makes a difference for everybody up and down the supply chain. It is a real challenge."

Shiels said logistical problems will continue well into next year, especially as rail rates begin to mirror the increases in ocean freight costs.

"My sense is that people are not sitting on huge inventories right now," Shiels said.

"There is just really strong demand. We have been chasing that with price increases. Inflation is real."

As for possible capacity increases, Shiels said Kraton "is not particularly capacity-constrained."

"We are looking at some debottlenecking in the next year or two," he said. "We are looking at some things, but we are in a fortunate position right now."