ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU
The rubber industry has been suffering from a poor economy and rising feedstock costs just like the rest of the chemical industry. Yet, in some sectors, its problems go even further. Styrene-butadiene rubber (SBR) is in such bad shape that some producers are shutting capacity and putting their businesses up for sale; one company even declared bankruptcy. Ethylene-propylene rubber (EPDM) makers are faring a little better, but a decline in the auto industry and additional capacity may dampen this sector as well.
According to the International Institute of Synthetic Rubber Producers (IISRP), the 2.2 million-metric-ton-per-year North American synthetic rubber industry showed no growth in 2002. Demand for SBR--the largest segment--fell by 1.8% during the year. Polybutadiene and isoprene rubber showed some growth in 2002, EPDM and polychloroprene declined, and acrylonitrile-butadiene rubber was flat.
SHUTTERED To cut costs, Bayer closed one of its Sarnia, Ontario, butyl rubber plants and a polybutadiene plant. BAYER POLYMERS PHOTO
The rubber industry group forecasts a moderate 1.6% annual growth rate for synthetic rubber through 2007, with 1.3% growth for SBR, 2.2% for polybutadiene, and 2.9% for EPDM.
Timothy Rae, Bayer Polymers' head of regional product management for polybutadiene rubber and butyls, says slow growth has combined with a 1990s capacity buildup, particularly in Asia, to create intense oversupply in synthetic rubber, and producers are cutting back production to adjust. "Overall, the rubber industry is going through a couple of years of difficult times, and production has pulled back significantly to reflect the demand," he says.
Observers say the North American tire industry is in a state of decline. For example, earlier this month, Goodyear Tire & Rubber reported that sales volume for its North American tire business decreased by 7.2% in 2002, to 104 million units, while volumes for most other regions increased.
Stephen J. Zinger, an elastomers consultant with Chemical Market Associates Inc. (CMAI), says tire production has been moving to Asia. "Labor is a big component in the production of tires," he says.
But Thomas J. Reese, a former executive with Continental Tire, speaking at a CMAI conference in Houston late last month, said the tire industry's problems run deeper than that. He pointed out that tire makers improved their warranties from 20,000 to 80,000 miles over the years but didn't cut capacity to compensate. Whitewall tires, which used to get a 5% premium in Detroit, are gone, as are snow tires. He predicts cell phones will make spare tires obsolete.
MOREOVER, Reese said, tires are becoming a commodity that consumers buy on the basis of price and warranty alone. Tire companies, however, are pouring millions of dollars into their brand names. Reese pointed out that "40,000 miles is 40,000 miles, but majors are still trying to get a premium for their 40,000."
Bob Nelson, general sales manager at Goodyear Chemicals, says tire production is the biggest consumer of synthetic and natural rubber. The business uses the vast majority of the emulsion and solution SBR, polybutadiene rubber, and isoprene rubber that is made. "The rubber industry goes as the tire industry goes," he says.
Nelson says operating rates for plants making emulsion SBR, a commodity tire rubber, are between 60 and 65%--and this is up from about 55% a couple of years ago. "There is a lot of old capacity out there because most of the emulsion SBR plants in North America and Europe were built in the early 1940s," he says.
Part of the problem for emulsion SBR, Nelson says, is that it is being replaced by solution SBR in many applications requiring higher performance. He notes, for example, that tire makers looking to decrease rolling resistance without sacrificing traction are turning to solution SBR, or even isoprene terpolymers or other copolymers. As a result of this substitution, demand for emulsion SBR decreased by 4.3% last year, while solution SBR demand rose 3.8%, according to IISRP.
Another issue for synthetic rubber, particularly for polybutadiene and emulsion SBR, is competition with natural rubber, which can be substituted for polybutadiene in tire applications by 3 to 5% and up to 20% in other applications, according to Goodyear's Nelson. When natural rubber prices are low, tire makers change their formulations.
Jack McLaughlin--head of Bayer's marketing unit for tires and high-impact polystyrene--says that five years ago, when natural rubber prices were very low, tire producers added more natural rubber to their formulations. Recently, natural rubber prices have climbed significantly, although tire makers have not yet switched back to synthetic rubber.
On the supply side, the synthetic rubber industry is being squeezed by high petroleum costs spurred by the run-up to the war in Iraq and an oil workers' strike in Venezuela. Also, the natural gas supply crisis that has hit North America has been hurting tire makers and other rubber fabricators.
On top of the energy price problem, the industry's single biggest chemical raw material, butadiene, is in short supply. Observers explain that naphtha-based ethylene crackers--throttled back because of high naphtha prices and low demand for ethylene derivatives--are producing little coproduct butadiene. "You have fewer molecules going through the ethylene crackers and fewer by-products coming out because you are using lighter feeds," Goodyear's Nelson says.
CMAI's Zinger agrees. "The price of butadiene is moving up significantly, and that is putting a lot of pressure on rubber producers," he says. CMAI says butadiene prices will increase by nearly 50% this year, having increased by 100% since the beginning of 2002.
McLaughlin says tight butadiene supplies impact more than just prices. "Butadiene is not easily available," he explains. "Just getting the raw materials to produce is causing problems throughout the industry."
All these factors have led to trouble for synthetic rubber producers. Three--Goodyear, Ameripol Synpol, and DSM--are considering selling their businesses.
Goodyear says it is putting its chemical business up for sale to improve its finances; the company has also restructured nearly $3 billion in debt to the same end. The chemical business had sales in 2002 of nearly $940 million and operating income of about $70 million. About 65% of the chemical business' output goes to Goodyear's own tire business.
International Specialty Products is in discussions to buy Ameripol Synpol, which filed for bankruptcy in December. Last year, Ameripol shelved its Odessa, Texas, SBR plant; it laid off about 80 workers at its remaining Port Neches, Texas, facility earlier this year.
Observers say DSM's elastomers operations, which contain SBR and EPDM businesses, are up for sale. The company, which is focusing on fine and specialty chemicals, sold its European petrochemicals business to Saudi Basic Industries Corp. last year, and rubber is now seen as nonstrategic. "Ever since SABIC's acquisition of their petrochemical assets, this business has kind of stood alone," Zinger says.
Zinger says financial industry buyers--and he puts ISP, which has no direct connection to rubber, in this category--are the most probable purchasers of these businesses. "Because profit margins have been poor, there hasn't been a lot of interest. The companies that would be interested do not have a lot of cash flow," he explains.
IN THE MEANTIME, rubber producers are responding to poor profit margins through cost cutting. "Everything is being impacted," Bayer's McLaughlin says. "How many visits to a customer do you need during a year? How much tech service do you supply? What custom work do you do? Or do you strip down to having one product in a wooden crate that goes out the door at a certain rate?"
Bayer has closed a 36-year-old polybutadiene plant in Sarnia, Ontario. Bayer's Rae says the company has moved production to its plant in Orange, Texas, which was expanded in 1999 and can make both solution SBR and polybutadiene rubber. "It gives us the flexibility to react to changing market requirements," Rae says.
Goodyear is using the Six Sigma efficiency program to improve operations. Nelson credits Six Sigma with lowering costs by $40 million in the firm's chemical business. The company also closed 48,000 metric tons of capacity at its Houston SBR plant in May 2001. The company had expanded its Beaumont, Texas, plant by 110,000 metric tons a year earlier to make, like Bayer, both solution SBR and polybutadiene.
EPDM has performed better than most other synthetic rubbers, but its growth has slowed from the 1980s and 1990s, when automotive and commercial roofing markets were expanding at a 6 to 8% annual clip, according to Joe Gatto, who heads Crompton Corp.'s EPDM business.
The slowdown came to a head in 2001 when, thanks to the recession, EPDM consumption declined by 14% in North America and 7% globally, Gatto says. Last year was flat, and he expects 3% growth this year. "I think there has been a solidification in the downstream markets, so I would expect some growth," he says.
Torkel Rhenman, global business director for Nordel EPDM at the DuPont Dow Elastomers joint venture, contends that the industry is in a process of renewal. "As modern capacity is being brought on-line, older, higher cost units are being mothballed," he says.
RUBBER CHECK Goodyear expanded its Beaumont, Texas, plant in 2000 to make both styrene-butadiene rubber and polybutadiene rubber. GOODYEAR PHOTO
Gatto is concerned about a decline in sales to the automotive industry, which comprises about 50% of the EPDM market, either directly through applications such as seals or indirectly as an impact modifier for automotive plastics. Ford and General Motors recently announced a reduction in car output for this year. However, Rhenman expects stronger growth in Asia to offset the North American results.
Overall car output aside, Gatto says more and more EPDM is being used per vehicle. He says EPDM's high heat resistance is winning it more applications under the hood, where it performs better than natural rubber. It is also replacing polychloroprene in belt applications.
In addition, use of EPDM/polypropylene thermoplastic vulcanizates (TPVs) is growing in sealing applications and in dense parts. "TPV is probably the fastest growth market for EPDM, although it is partly replacing thermoset EPDM," Rhenman says.
But TPVs are facing stiff competition from thermoplastic olefins, particularly in automotive interior applications, Gatto acknowledges. EPDM is also under pressure as an impact modifier for polymers because new catalyst systems allow rubberlike properties to be incorporated directly into the polymers, which eliminates the need to compound them with EPDM.
Rhenman is excited about the impact that the metallocene-catalyst EPDM is having on the market. DuPont Dow makes metallocene-based EPDM at a plant that it is leasing from Dow Chemical in Seadrift, Texas. Dow obtained the Unipol-technology plant in the Union Carbide acquisition. "Metallocene EPDM is taking significant share from the older Ziegler-Natta technology due to greater product cleanliness and significant advantages in manufacturing efficiencies," he maintains. The company is expanding its Plaquemine, La., nonmetallocene EPDM unit by 35,000 metric tons next year.
ExxonMobil is building a plant in Baton Rouge, La., that will make metallocene EPDM and other ethylene elastomers. The 90,000-metric-ton plant is expected to be completed during the third quarter of this year.
Crompton doesn't make metallocene EPDM, but Gatto claims he isn't concerned about its arrival, saying his company can achieve the flexibility it needs with Ziegler-Natta catalyst systems. "We feel that the products we can make with our systems are meeting and exceeding the market needs, and that is where we ought to be," he says.
Gatto is concerned, however, by all the capacity coming onstream. It may take a while, he says, for demand to catch up to the new supply.
But as competitive as the EPDM business gets, it's not likely to approach the difficulties of the rest of the synthetic rubber industry. For Goodyear's Nelson, there's only one thing to do when the market gets as bad as it's been. "You try to control the things you can control and let the other things put a knot in your stomach," he says.