Global adhesive raw materials market report
Overview:
- With oil and natural gas at the beginning of the supply chain, 87% of the raw materials H.B. Fuller purchases for making adhesives is several steps down the supply chain
- Changes in the supply/demand balance through the entire chain have greater impact on adhesive raw materials prices than the change in oil and natural gas prices
- Markets for ethylene and ethylene by-products have tightened, and demand/supply factors, which vary from chemical to chemical, are impacting the price of most adhesive raw materials more than the price of crude oil in the global market
- Over the next 18 months, increasing economic growth and demand for most petrochemical products and by-products will keep supply and demand for many key feedstocks and adhesive raw materials balanced to tight
- Production outages earlier in 2015 affected all three technologies, water-based, hot melt and solvent-based, that are used in the adhesives market
- The worldwide market for petrochemical by-products is being driven at the present time by European and U.S. demand for imports from Asia
- Some of Europe’s plants are still offline and inventories need to build before supply returns to normal
- Among the products affected directly or downstream are acrylates monomers, styrene, butadiene, isoprene and tackifying resin oils
- Ultimately the global adhesive raw materials market is affected by regional supply/demand variations, production outages, currency fluctuations, GDP growth rates and unpredictable geo-political conflict.
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Afera's Marseille conference presentation series
Recently Lydia Garyfallou, Geographic Sales Manager and Strategic Accounts Manager at H.B. Fuller Converting Solutions EIMEA, updated adhesive tape suppliers and manufacturers at Afera’s Annual Conference 2015 on the global adhesive raw materials market. She reviewed the state of crude oil and natural gas as forms of energy, downstream markets, the global economic forecast, and the way these forces affect global raw materials markets.
The bottom line: Changes in the supply/demand balance through the entire supply chain have a greater impact on adhesive raw materials prices than the change in oil and natural gas costs. Over the next 18 months, increasing economic growth and demand for most petrochemical products and by-products will keep supply and demand for key feedstocks and adhesive raw materials balanced to tight. The worldwide market for petrochemical by-products is being driven at the present time by European and U.S. demand for imports from Asia. The future will show that more investment should be made to avoid cost and supply situations like last year’s. 
Disclaimer
This presentation was based on industry knowledge and opinions, in-house research and publicly available news sources. While H.B. Fuller believed it to be accurate when published, no guarantee of accuracy was made.
Any forward-looking comments were based on market conditions at the time and assumptions which were likely to change as the future unfolded.
Looking back
Looking back on 2013 and early 2014, energy (crude oil and natural gas) was relatively stable and supply/demand was balanced globally for most petrochemicals. This began to change mid-2014 when the Organisation of the 
Petroleum Exporting Countries (OPEC) announced it was not going to cut production to balance world crude oil supply/demand and support prices. This began the recent sharp decline in global crude oil prices.
The full potential impact of the crude oil decline was completely realised in Europe because of two factors: The first was currency. The euro started to weaken appreciably against the dollar in the fall of 2014. Since crude oil is purchased in U.S. dollars, the decline in crude oil prices was partially offset for European petrochemical producers by the weaker euro. Then in 2015, the European petrochemical producers had a large number of unplanned ethylene cracker outages, which tightened the supply/demand balance for ethylene and other by-product petrochemicals, driving up petrochemical prices.
The longer-term issue with the current, relatively low crude oil prices is a sharp decline in investment into new energy drilling. This will eventually tighten crude oil supply/demand and raise crude oil prices.
Crude oil prices free-fell from over $100 to less than $50 per barrel from June 2014 to January 2015—just within seven months. At the same time, analysts foresaw crude prices continuing to fall to a low of perhaps $40/barrel by June 2015. That didn’t happen. Instead, crude bottomed at $47.61/barrel in January, then rose to ~$60 by the end of June. Recently, however, it has weakened to ~$45/barrel on forecast weakening demand.
Still, with a drop of more than 50% in crude oil prices, you would have expected some similarly dramatic changes in downstream markets deriving from crude oil. For the most part those also did not occur. Ms. Garyfallou used ethylene as an example (below) to demonstrate why.
The crude oil outlook for 2015 and beyond
Crude oil is not expected to go higher in the foreseeable future. With crude hovering at ~$45 per barrel when this presentation was given, the question is no longer, how low will it go? Rather, how high will it go? According to most analysts, it will go only a little higher.
As the price of crude oil was plummeting last year, only one of the world’s major producers reduced production. This occurred in Libya, where ISIL destroyed much of the country’s production capacity. The rest of OPEC and Russia, however, maintained production.
The U.S., meanwhile, was reported to have cut production. Indeed, the number of fracking wells declined from 1,608 in October 2014 to 747 in April 2015. As a result in advancements in fracking technology, however, output rose from 9 million barrels per day to 9.5, so the impact was minimal.
If and when the sanctions against Iran are lifted, the country has the capacity to add three to four million barrels of oil per day to the international supply. Iran also has an estimated 35 million barrels of stored oil available to place on the international market immediately.
The supply of oil is expected to remain strong in the coming years, at a time when global economic growth is producing only small increases in demand. As a result, analysts foresee crude oil prices somewhere between $40 and $50 per barrel for the next year or two.
Ethylene cracker output comparison
Ethylene crackers use heavy feedstock such as naphtha, which is derived from crude oil, or they might use light feedstocks such as ethane, propane and butane, which come from natural gas. In recent years, natural gas and lighter feedstocks have been priced well below crude oil and have come to be the preferred cracker feeds in the U.S.
Ethylene crackers are used fundamentally to produce ethylene, but they also produce a wide variety of by-products such as propylene, C4, pygas and many more. Most adhesive raw materials are derived from these by-products. Lighter feeds, however, produce only ~5% as much by-product.
Asian crackers prefer readily accessible naphtha from crude oil as well as methanol from coal. Cheap crude oil lowered the cost of naphtha-based ethylene products in Asia. Meanwhile, the price of crude did not drop nearly enough to induce U.S. producers to shift back to production of heavier feeds. As a result, cheap crude had virtually no impact on U.S. ethylene. The preference for lighter feeds also means that the U.S. remains a big net importer of ethylene by-products, because it cannot produce enough natural gas.
At the same time, import demand for Europe is increasing due to several unscheduled ethylene cracker production outages. Currently, both the U.S. and Europe are dependent upon Asia for those naphtha by-products, at a time when domestic demand in the Asian market is also increasing, albeit slowly.
The markets for ethylene by-products, including those mentioned above but also those from further down the supply chain, such as acetone, acrylates, aromatics, butadiene, ethylene glycol, ethylene oxide, isoprene, resin oils, phenol, polyethylene, polypropylene and more, also remain tight in global supply.
In short, the markets for ethylene and ethylene by-products tightened, and demand/supply factors, which vary from chemical to chemical in their own dynamics, are impacting the price of most adhesive raw materials more than the price of crude oil in the global market.
From crude oil and natural gas to specialty chemicals
90% of crude oil and natural gas is made for heating and transportation fuels. The remaining 7% goes to basic chemicals, ~2% to intermediate chemicals, and less than 0.4% to specialty raw materials.
Changes in the supply and demand balance through the entire supply chain have greater impact on adhesive raw material prices than the change in oil and natural gas prices. 
With oil and natural gas at the beginning of the supply chain, 87% of the raw materials H.B. Fuller purchases for making adhesives is several steps down the chain in the (0.4%) specialty raw materials category. Supply and demand at each of the intermediate steps (basic chemicals, intermediate chemicals and specialty chemicals) can completely disengage the impact of oil and gas. The price of crude oil and gas, therefore, must be disconnected from the price of specialty chemicals.
The majority of raw materials produced from crude oil and natural gas:
- Transportation fuels and heating fuels (93%)
- Commodity plastics, rubber products, transportation fuels, heating fuels (1.47%)
- Commodity plastics and rubber products (0.32%).
Economic outlook
The International Monetary Fund (IMF) and the World Bank agree that worldwide economic growth will increase into 2016. Both also say that the growth will be mixed. It is projected to strengthen in the world’s advanced economies, but economic growth in expected to be weaker in developing economies.
For the adhesives industry, economic growth can be a double-edged sword. It increases demand for energy and petrochemical products, often causing upward pressure on pricing. Slower growth, then, should have the opposite effect. Instead, it often leads to cuts in production.
Over the next 18 months, increased economic growth and increasing demand for most petrochemical products and by-products is anticipated. This will keep supply and demand for many key feedstocks and adhesive raw materials balanced to tight.
The World Bank forecasts global growth in “world output” to increase from 2.6% in 2014 to 2.8% in 2016 and 3.3% in 2017. Both the IMF and the World Bank see most of the world’s economies or high income nations growing at an accelerating rate, and developing countries slowing down in 2015, then moving ahead in 2016. But it is worth noting that even in 2015, developing countries will still grow faster than developed countries.
Economic growth varies by region
The IMF goes on to note, however, that “an unusually complex set of forces [is] shaping the world economy.” While the economy has finally stabilised in the aftermath of the Great Recession of 2007-2009, these forces provide for some volatility and risk going forward. First, “weak banks and high levels of debt” remain from the Recession era, and “deleveraging will take time”. Second, population aging in the advanced economies had already reduced potential growth before the crisis occurred. This in turn will lead to lower investment and then to lower growth today.
On top of these factors are two other forces, the decline of the price of oil and currency exchange rates, that produce “winners and losers”. The biggest loser at the present time is Russia, because its economy is almost entirely dependent upon crude oil and natural gas exports. The World Bank sees Russia already slipping into recession as growth declines from 3.4% in 2012 and 0.6% in 2014 to -2.6% in 2015. Growth in the Chinese economy is slowing dramatically, but this is a voluntary action by Chinese authorities to reduce risk and volatility in their economy.
Weak currency, cracker outages trouble Eurozone
In Europe, the fall of the euro to a 12-year low of $1.10 versus the U.S. dollar is a big problem. Most energy and petrochemical products are traded on international markets in U.S. dollars, so this increases the cost of those imports into the European market. In fact, the weakness of the euro has very largely neglected the positive impacts of low-cost crude oil over the past year.
Meanwhile, the European market has been wracked by a series of ethylene cracker outages while demand has remained good. This has forced Europe to look to Asia to import ethylene as well as its various by-products. The result is a very tight market for ethylene, off-setting the advantages of low-cost crude oil.
What does this all mean for adhesive tapes?
Production outages earlier in 2015 affected all three technologies, water-based, hot melt and solvent-based, that are used in the adhesives market. The worldwide market for petrochemical by-products is being driven at the present time by European and U.S. demand for imports from Asia. Europe has experienced a number of production outages, with at least ten plants declaring force majeure earlier in the year. Some of these plants are still offline and inventories need to build before supply returns to normal. Among the products affected directly or downstream are acrylates monomers, styrene, butadiene, isoprene and tackifying resin oils.
Raw materials supply: The issue with hot melt PSAs
The supply of raw materials for hot melt adhesives is influenced primarily by changing supply/demand scenarios in competing industries and by the trend toward light cracking, which reduces the supply of several key feedstocks:
- Prices for hydrocarbon tackifier resins are largely disconnected from crude oil prices. The market for non-hydrogenated resins is currently tight, especially in the U.S. due to an explosion at an Eastman plant.
- Hydrogenated hydrocarbon resins likewise remain disconnected from oil price movement because of tight supply despite weakening demand.
- For natural-sourced tackifying resins like rosin esters and terpene resins, supply/demand is balanced; however, these are independent of crude oil.
- Block copolymers (SBC like SIS and SBS) have a more balanced supply/demand as demand for the monomers styrene, isoprene and butadiene from the tire market remains weak.
Water-based PSAs
Acrylate polymers are typically the main backbone of water-based PSAs for tapes. Acrylate monomer costs tend to follow feedstock propylene costs, but, again, supply/demand has played a large role as there were production outages for the acrylate monomers during the summer of 2015.
Solvent-based PSAs
Some of the polymers and tackifiers used in hot melt and waterborne PSAs are also used in solvent-based PSAs. So the market dynamics are the same as above.
The future is yet unknown
The global adhesives market is impacted by many factors:
- Supply/demand variations from one region versus another
- Production outages of upstream feeds, whether planned or unplanned
- Currency fluctuations and economic recovery/GDP growth rates
- Socio-political conflict, e.g. Russia-Ukraine and Turkey-ISIL, with unpredictable economic consequences.
During discussion with the audience, Ms. Garyfallou stated that the future will show that more investment should be made to avoid cost and supply situations like last year’s. Europe and the U.S. will ultimately have to look to Asia for their necessary raw materials. Visit H.B. Fuller’s website for its latest Global Raw Materials Report.
About Lydia Garyfallou
Lydia Garyfallou currently works for H.B. Fuller Converting Solutions EIMEA as Geographic Sales Manager and Strategic Accounts Manager. She has 11 years of experience in the adhesives industry and holds an MBA degree.
Questions and comments?
Lydia Garyfallou
Geographic Sales Manager
H.B. Fuller Greece SAIC
51 Agamemnonos str.
176 75 Kallithea, Athens
Greece
T +30 21095 93253
M +30 6947 723014