Raw material shortages drive upcosts adhesives

Raw material shortages drive upcosts of adhesives

5:11 AM, 7th August 2018
Raw material shortages drive upcosts of adhesives

By Dr Thunuguntla Jai Mangal Sinha

India is one of the fastest growing economies of the world. Though currently a significant slice of this growth is attributable to the services sector, the manufacturing sector has the potential to emerge as one of the high growth sectors in India. The latest report from the Centre for International Development at Harvard University (CID) states that India’s productive capabilities far exceed expectations for its current income level, which contributes to the projection of rapid growth for the coming decade.

This growing demand witnessed across various segments of the manufacturing sector has led to a concomitant increase in the demand for raw materials. A case in point is the Indian adhesives industry, which over the last few years has been witnessing a surge in demand, has led to an increase in demand for raw materials used such as isocyanate and polyols, the key ingredients in Polyurethane (PU) based adhesive composition. Nevertheless, a major point of concern is that investments in capacity enhancement are unable to meet the soaring demand for several raw materials used in producing adhesives.

Imports from many production sites in the developed countries have also got affected, as these are mostly decades old facilities, which have been hit with unscheduled, prolonged downtimes due to severe maintenance issues. The maintenance periods of these plants have been getting longer by the day and are often taken up in a haphazard (unscheduled and unplanned) manner.

Besides, increasing regulations on the chemical industries are pushing production costs northwards on the one hand and influence investments to meagre levels on the other. These regulations also have a telling effect on the existing capacities by rendering them incapable of being utilized to meet demands from across the globe. Shortages in raw materials used to manufacture various types of adhesives have resulted in the prices of raw materials sky rocketing.

This manifests into a bigger challenge for adhesive manufacturers as several key raw materials used in adhesive production are required in much smaller quantities when compared with the requirements of other industrial sectors.

The demand and requirements of those sectors majorly impact the availability and pricing dynamics, resulting higher cost for smaller buyers who do not have the bargaining power of bulk buyers. Thus, adhesive industry ends up competing with manufacturers of tyres (rubber), footwear (polyurethanes), transport (automobiles / aviation), electronics, paints and inks (acrylics) etc among others.

According to estimates the global isocyanate market is likely to grow at a CAGR of 6.56 percent during the period 2018-2022. The adhesive industry members are constantly on their toes to ensure continuous supply of this raw material when demands soar, given the above scenario. While there has been an increase in the demand for PU steadily, the same has not reflected in the capacity enhancement over the years.

This means that the existing capacities are expected to service the growing demand, resulting in overutilization of these capacities, which have in turn led to frequent breakdowns and maintenance issues.

While capacity enhancement has been one of the main reasons, throughout 2017, the market for aromatic diisocyanates — toluene diisocyanate (TDI) and methylene-diphenyl diisocyanate (MDI) — was very volatile and saw multiple force majeure situations which resulted in price escalation as well. Even towards the end of 2017 businesses were seeking to secure volumes for January and beyond in the event of an upward pressure on pricing. Moreover, executives at isocyanate producing companies have expressed that an imbalance in supply and demand dynamics will continue over the next few years. When we consider the force majeure situations and compare them to the pricing trends, it becomes amply clear that other than the price movements of base chemicals as well as their demand and supply constraints, we see an increasing number of outages driven by equipment failure, extremely high capacity utilization, regulations and even adverse weather conditions, which put pressure on costs and thus pricing.

The adhesive industry utilises pure MDI in food packaging related applications, which has the highest number of processing steps and from forecasts the market continues to show a striking imbalance between demand and supply. Even with production capacity returning to pre-Force Majeure level, the total demand is still strong and growing, keeping market price levels high. One of the other key ingredients used in manufacturing PU based adhesive is Adipic Acid (ADA). Almost 30 percent of the demand for ADA across the globe is attributable to PU. While additional capacity in Asia is expected to come on stream from next year, ADA prices, however, are firmly supported by strong feedstock cost, as well as balanced-to-short supply in 2018.

Thus, the overall demand versus supply situation of PU from the adhesive industry perspective looks grim. While industry stakeholders are hoping for improvement, the only way the current situation can be mitigated is through capacity enhancement which should have been planned a few years ago. For the interim, though it seems like high production costs are something that downstream PU users will have to deal with resulting in higher cost for the end users.

Author: Dr. Thunuguntla Jai Mangal Sinha is a Freelance Consultant, Scientist and Technical Advisor.

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