2018 wasn't a dream year for the silicone products market, and 2019 is off to a similar start. In the first week of January, a Wacker facility in Burghausen, Germany, announced force majeure for its high consistency rubber (HCR) silicone product line.
Wacker's announcement is the latest in a series of signs that the silicone market – and HCR silicone in particular – is in dire straits. Much of this has to do with severe shortage of the basic raw material siloxane. The global siloxane capacity has shrunk by as much as 10 percent since 2010. And it took a whopping 80,000-ton hit when Momentive's facility in Leverkusen, Germany, shut down.
Supply shortages plagued the silicone market throughout 2018. But the factors leading up to these shortages date back much further. Since the financial crisis of 2008-09, suppliers have made little to no investment in basic plants and assets. At the same time, global demand for silicone products has grown by leaps and bounds, throttling companies and forcing them to resort to allocations.
The liquid silicone rubber (LSR) industry has fared relatively better than HCR. LSR companies that have managed their supply chains well and maintained good communications with their vendors and customers, have stayed afloat despite the global supply shortage.
Possibilities of improvement
The facts paint a bleak picture for now, but industry experts do see better days on the horizon. Leading silicone manufacturers like Wacker, Dow and Shin-Etsu have announced huge investments in their silicone operations over the next few years. They'll be focusing on building up their capacities and making debottlenecking improvements every year.
But there's a catch. It's going to be while before the benefits of these investments start reflecting in the market. Most companies are looking at a 12-24 month wait, which means that the rest of 2019 will likely remain ridden with challenges. Only a dramatic step like the building of a new plant can bring about immediate improvements.
The pricing situation
As companies brace themselves for the months ahead, they can't help but fixate on the rising prices of silicone. Global raw material shortage drove base and gum prices to all-time highs last year. Where a 3-6 percent annual increase was considered normal, some companies saw prices shoot up by as much as 60 percent in 2018. On average, there's been an 8-15 percent rise across the board.
Dealing with price increases of this scale isn't easy because they can't be passed on to the customer or end user. As a result, companies have to either foot the extra costs themselves, or go back to exploring other materials from which they had originally transitioned to silicone.
Shifting to LSR alternatives may also be a viable option for companies that currently deal in HCR silicone.
What about Asia?
Asia hasn't been the most reliable source of silicone for the North American market. Of late, China's Environmental Protection Administration has been getting stricter about anti-pollution compliance. Factories are routinely shut down for inspections, often affecting the supply chain for weeks at a stretch.
In parallel, the demand for silicone in Asia itself has skyrocketed, prompting European suppliers to send raw material there and worsening the shortage for North America. It was only in the last quarter of 2018 that the Asian demand stabilized somewhat and prices took a downward turn.
But all is not well yet. The looming possibility of trade wars keeps the future uncertain. Also, because so many facilities in North America have zero availability of raw material, Chinese suppliers don't have a reason to reduce their prices.
In short, the slowing Chinese economy could open up some more supply channels for the American market, but it's unlikely to bring down prices anytime soon.
Riding it out
Though businesses across the silicone production chain have their work cut out for them, they have found ways to navigate the situation. In most cases, communication has been the key. With prices stabilizing to an extent, companies have been able to get guarantees on volume and price from their suppliers.
Plus, after nearly 3 years of allocations in the market, customers have also learned to communicate their needs better. Buyers and sellers are now working together, planning ahead, and giving suppliers a clearer picture of their future requirements.
So what's on the cards for 2019? Finding new sources of silicone supply, for sure. Also, exploring alternative materials that can supplement or replace HCR silicone in existing operations. While most industry professionals feel that the worst of the supply problem is over, they also caution against expecting things to change very soon. Ultimately, patience is what they think it'll all boil down to.