By most economic indicators the U.S. economy appears to have stabilized in 2014 to a greater degree than at any time since the onset of the Great Recession. As a result, fears of a return to a recession have abated. For the first time in recent years, macroeconomic factors have substantially given way to matters of supply and demand as key drivers in many industry markets—including those for petrochemical by-products and feedstock, and adhesive raw materials.

Adhesives are compounded products, typically containing more than one raw material. Overall adhesive cost trends do not follow any one individual raw material. Approximately 50% to 80% of a typical adhesive manufacturer’s total costs derive from raw materials. Close to 80% of these materials are petroleum based. The influence of raw materials means developing a comprehensive strategy to manage their costs should be a priority for the adhesive manufacturer.

With lower oil prices, one would think there should be a significant price reduction in petrochemical derived raw materials such as polymers and hydrocarbon resins, but that is not the case. Adhesive raw materials monomers are a by-product of the cracking of crude oil and natural gas in the production of fuels. Because of this fact their production is not a priority to the crude refinery industry.

Currently, there are several key factors that are driving the downstream petrochemical markets. These include the following:

• In general, the U.S. feedstock suppliers have switched to lighter feed slates, which produce fewer raw materials for polymer and hydrocarbon resin production. The foreign feedstock suppliers still crack a heavier feed slate compared to the U.S. and have a better hydrocarbon feedstock supply. While there should be ample supply of these feedstock from overseas, the quality of some of these products does not allow them to be used in critical applications where odor or compatibility are of extreme importance. In some cases, the price will be very attractive, but the old adage of “you get what you pay for” should be heeded closely with some of these foreign sources.

• Natural gas is still the favorite feed for ethylene crackers, but crude oil sets the energy price floor. Crude oil remains sensitive to global geopolitical influences.

• Ethylene and propylene are linked to crude oil cost movement. Demand for ethylene and propylene tends to track GDP growth.

• The supply and pricing of all by-products of ethylene crackers—including aromatics, styrene, butadiene, resins oils—are affected due to the impact of light cracking.

• Acetic acid is a key feedstock for vinyl acetate monomer and acrylic monomer, have been hit hard by a number of production outages across the globe.

• Supplies of natural feedstock such as gum rosin and terpenes are relatively balanced to demand, but most are higher priced than a year ago due to higher labor and other costs.

According to a report on adhesive raw material cost trends published by H.B. Fuller, pricing of key monomers—ethylene, propylene, styrene, butadiene, methanol, acetic acid—used in the manufacturing of key adhesive raw materials will either remain flat or will be pushed up due to several factors which include the following:

• Planned and unplanned outages of production facilities, resulting in reduction of supplies. For example, “among the world’s 33 largest producers of acetic acid, no fewer than 14 have had unplanned outages [in 2014]. Another 16 have had planned outages. One declared force majeure and two have been on allocation. A total of 28 plants have operated at reduced capacity. Only one plant out of the 33 has not had an outage or supply reduction. As a result, prices have a skyrocketed as much as 30% to 33%.”

• The expected continued economic growth in the U.S. will increase demand of these materials. This will further put upward pressure on the price of these materials unless supply is increased.

• For large molecule monomers such as styrene and butadiene, the increasing use of light feeds has reduced the availability and increased the cost of those feeds.

• Due to relatively weak demand in Europe and Asia, new production projects on key materials such as butadiene have been put on hold. Pricing for this material is likely to continue to trend upward in 2015.

The above factors have affected pricing of several polymers used in adhesives. For example;

• Vinyl acetate monomer (VAM), a leading raw material of water-based adhesives, will remain at high price levels in 2015 due to a series of plant shutdowns both in acetic acid production and in VAM production.

• Tackifier resins, including both hydrogenated and non-hydrogenated resins, also are experiencing tight supply as 2015 unfolds. The growth in demand for these resins has exceeded GDP, and has exceeded the available capacity in the industry. Scheduled maintenance will reduce supply in the second half of the year, and planned new capacity has been delayed. As a result, several key producers of hydrocarbon resins are on sales allocation of as much as a 40% volume reduction. We anticipate a higher pricing for these products in 2015.

• Reactive adhesives generally are expected to remain under pressure due to tight supplies of aromatic petrochemicals. Isocyanates (MDI) are most impacted, as they are on allocation from several suppliers, and there were several rounds of price increases by key suppliers in the third quarter last year.

• Polyether polyols are in tight supply with announced price increases. Key suppliers in North America are sold out, while explosions at a Shell/BASF site in the Netherlands have put propylene oxide feedstock in short supply. The site is expected to be offline for nine months or more.

Managing raw materials cost remains a top priority for adhesive manufacturers. Although the cost of raw materials used in manufacturing has eased somewhat since hitting a historic, mid-recession peak in 2008, the raw materials market remains volatile both in the United States and abroad. Manufacturers continue to be concerned about coping with these pricing fluctuations, and many firms are seeking new ways to mitigate risks associated with raw materials instability.

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Jack Raidy is the president and CEO of W.F. Taylor Co., with over 26 years of experience in the flooring industry. He first began as Taylor’s executive vice president and was part of the team that developed the very first environmentally friendly  flooring adhesive, Envirotec Healthguard—the first to achieve the coveted GreenGuard certification. You can reach him at (800) 397-4583 or marketing@wftaylor.com.