Adhesives: Steady growth to stick around
1:50 PM MDT | April 17, 2013 | —Vincent Valk
New applications for adhesives, including in automotive and aerospace, are helping drive growth in the sector as demand in large segments, such as construction, picks up.
Growth in the adhesives and sealants sector is expected to be broad, market players say, as adhesives gain share from mechanical fasteners, emerging market growth continues to build, and key sectors such as US housing rebound. Many end markets “are growing faster than GDP right now, at least over a multiyear period,” says Mike Roman, v.p. and general manager/industrial adhesives and tapes at 3M. Mobile handheld electronic devices, medical devices, and automotive are among the adhesive end markets that 3M projects to grow faster than GDP, Roman adds.
Total global sales in the adhesives industry is expected to grow 3% year-on-year (YOY) in 2012, “faster than the overall economy,” Henkel says, citing figures from Feri EuroRating Services (Bad Homburg, Germany). Most of Henkel’s key end markets, including transportation and electronics, are also forecast to outpace GDP growth, the company says.
Adhesives are also gaining share from competing technologies in many sectors. “One of the major uses for specialty adhesives is in product assembly, where they compete with mechanical fasteners,” says Eric Linak, senior consultant with IHS Chemical. “Demand for specialty adhesives is expected to rise in the automotive and aircraft industries, as manufacturers switch to plastics, composites, and nonferrous materials of construction in order to reduce vehicle weights and reduce fuel consumption.”
The transportation sector is experiencing the fastest growth of any major adhesive end market, says Dan Murad, president and CEO of ChemQuest (Cincinnati), a consultancy. “It’s because of lightweighting, but it’s also because of the fast rebound in the automotive sector,” he says.
Producers agree that adhesives are gaining market share. “There continues to be a move from mechanical fasteners toward adhesives and that’s a long-term trend,” says Jim Owens, chairman and CEO of H.B. Fuller.
Application development, in recent years, has often focused on applying adhesives to new applications in lighter-weight materials, Roman says. Ceramics, engineered plastics, and composites are gaining share from traditional metals such as steel in automotive and transportation applications, and the materials work well with the bonding power of adhesives, producers say. Adhesives themselves are also lighter weight than mechanical fasteners. “There are designs … that take advantage of adhesives, to go to lighter-weight designs and lower-weight materials,” Roman says. “It is increasing [market] penetration in a growing pie.”
The automotive, aerospace, and transportation markets are not the only ones in which lightweighting of materials has sparked greater demand for adhesives. As electronics, particularly mobile phones and computers, get smaller and thinner, lightweight engineered plastics are playing a bigger role in device designs. Those plastics are, increasingly, held together by specialty adhesives. “Electronic materials are moving to more adhesive applications,” Owens says. “Advancement in materials has people wondering if they can glue stuff together rather than screwing it or fastening it.” Adhesive bonds are attractive for small electronic devices not just because they hold together well, but because they do not interfere with the aesthetic design of the device, producers say.
Meanwhile, economic growth in emerging markets is boosting consumer demand for nonwovens and hygiene products, such as baby diapers and feminine hygiene products, other key adhesive end markets. “A major driver we see is adhesive use in emerging geographies,” says David Mitchell, global marketing director/elastomers, electrical, and telecommunications at Dow Chemical. “We see a tipping point in disposable income. You see a huge expansion in growth … as the middle class expands and discretionary income rises.”
Demand for adhesives in the nonwovens market, which includes baby diapers, is expected to double in the next seven years, Mitchell says. This is mostly driven by a huge rise in emerging market demand, he adds. Consumers in those markets will not just begin purchasing products like baby diapers, but they will use more of them. A single diaper is used for a far longer time period in India than in the United States, Mitchell notes. Babies in developed economies use around 2,000 diapers per year, while in emerging economies the average is 1 diaper per day, according to IHS Chemical.
“We see pretty high growth in hygiene products,” including diapers and feminine napkins, Owens says. In the United States, market penetration rates for baby diapers are around 98%, according to Owens. The comparable figure for China is around 20%, while for India it is in the single digits, he adds. “As these economies move into the lower middle-income bracket, some of the first products consumers will buy are hygiene products,” Owens says.
Hygiene product customers are also asking for new capabilities from adhesive makers. Makers of baby diapers are “trying to find more places to add stretch material to diapers to improve comfort and fit,” Owens says. Diaper manufacturers are also looking to make the center of diapers thinner. Both trends increase demand for adhesives, which are needed to hold the material—including the superabsorbent polymer core of the diaper—together. While it can be complicated to bond stretch material, it is an opportunity for adhesive manufacturers, Owens says.
In mature markets, demographics are driving growth in some hygiene adhesive applications. Aging populations mean greater demand for products dealing with adult incontinence—products that often require complex, advanced materials and new adhesive formulations. “Adult products are becoming much more acceptable, and the population is aging in developed markets,” Owens notes.
Medical devices are another growing opportunity, also related to aging populations, in mature markets. 3M is experiencing growing demand from makers of medical devices and equipment, according to Roman.
Olefins on the rise
Users of stretch and elastic adhesives, such as baby diaper manufacturers, are increasingly looking to use olefin-based products, Mitchell says. This trend applies to other industrial users of adhesives, as well. Tackifier has been short in the market “and one trend is increasing the polymer content while not losing performance in hot-melt adhesives,” Mitchell says. “So, basically replacing the tackifier with polymer.”
The switch to olefin-based adhesives is broad-based and present in many industrial markets, including hygiene and packaging. For Dow’s elastomers business, “packaging is growing because of a shift to olefin-based solutions,” Mitchell says. “It’s growth for us, but it’s not market driven so much as a technology shift.”
For both adhesive makers and their customers, the shift to olefin-based adhesive products is related to cheap natural gas. Cheap gas is increasing the supply of light, ethane-based feedstocks, which can be an advantage for adhesive makers and can also lead to a lower manufacturing cost for their industrial customers. “With natural gas feedstocks, a lot of the higher-molecular-weight raw materials, such as styrene copolymers, have been coming under a lot of pressure,” Murad says.
Olefin-based adhesives can also lower costs for industrial users. “The big industrial plant owners understand that moving to an olefin base will give them a lower total cost to serve,” Mitchell says. Olefin-based adhesive products lead to fewer maintenance issues in industrial processes, as well as less down time, and processes that run cleaner and more efficiently, he adds.
Greater demand for olefin-based products is also driving R&D. Fuller is looking at chemistries that utilize cost-advantaged product chains. With the various cost advantages associated with now-abundant lightweight gas–based feedstocks, “finding ways to take advantage of … available polymers that have better pricing dynamics long term” is a key research priority, Owens says. Fuller’s R&D also encompasses “all kinds of things around the process,” he adds. “When you are in the manufacturing sector, getting speed and efficiency in your product line is critical.”
Henkel’s R&D is focused on polymer chemistry, materials management, surface treatment, metering systems, and packaging, the company says. The company spent €406 million ($533 million) on R&D in 2012 and 6% of its employees work in some R&D capacity, it adds. Personnel expenses account for about half of R&D spending, Henkel says. Some 32% of Henkel’s 2012 sales were derived from products launched in the last 5 years.
The tackifier shortage, meanwhile, has been driven by a lack of investment on the part of tackifier manufacturers, Dow and Fuller both say. While Dow’s customers are looking at replacing tackifier with polymers—and producers agree that demand for olefin-based products is rising, in any case—Owens expects the tackifier shortage to abate in the coming years. “I see a commitment by tackifier suppliers to build needed capacity, and as they make those investments the short-term issuers we’ve seen over the last couple of years can be mitigated,” Owens says. “Major players … have been slow to invest in capacity, and they’ve said that will change.”
The packaging market, meanwhile, remains resilient. Flexible packaging, such as cartons, is taking market share away from tin and glass in the food sector, which is good news for adhesives makers, Murad says. “Food packaging uses a lot of adhesive,” he notes.
Construction coming back
Another positive for adhesive makers is the rebound in the US housing and construction markets. “Construction is a tailwind for us,” Owens says. Fuller’s construction business focuses mostly on the tile and flooring markets, he adds.
“The rebound in construction is helping adhesives,” Murad says. Even infrastructure spending is a boon as governments look to refurbish existing structures rather than replace them in the face of budgetary constraints, he adds. This extends the life of existing structures and still leads to demand for adhesives.
Residential construction permits in the United States rose steadily throughout 2012 and totaled a 946,000 annual-rate in February of this year. As residential construction in the United States moves up from the bottom, construction in other countries is also in recovery. “You see large construction projects in Japan and other places,” Roman says. “The outlook for construction is much better than it has been.”
Henkel expects the construction market to expand by 3% YOY globally in 2012. Many emerging markets are still fairly strong in construction, adhesive producers say.
The rebound in US housing is good news for industrial adhesive makers, since construction is, along with transportation and packaging, a key end market. There’s some R&D going in construction, too. Fuller’s tiling customers are “trying to find high-performance grouts that are easy to apply,” Owens says. “They want high-performance grouts that can deal with different materials and not stain and that is driving a whole set of solutions.”
M&A slow but steady
The construction adhesives space is one of many adhesives subsectors that contain a number of small, niche companies. Market players say there has been talk of consolidation in construction adhesives, which may pick up now that the market is improving, although it is too soon to say. The economic rebound in general, however, should provide a boost to adhesives M&A, which is traditionally dominated by small deals.
Most companies in the sector remain small, according to IHS Chemical. In the United States, only about 10% of adhesives firms have more than 100 employees, while over half have fewer than 20, IHS Chemical says.
“I think a number of large companies are looking at their portfolios, at what’s important,” Murad says. “I think there will be some movement [in M&A activity] because of that.” Open credit markets and a rise in valuation multiples are also helpful for M&A activity.
There is certainly room for consolidation in adhesives. “Most of the deals in this business tend to be on the smaller side because it is highly fragmented,” Owens says. “I think you will continue to see that as people try to get a new technology or geographic presence.” Fuller, however, bucked the trend with the $394-million acquisition of Forbo’s industrial adhesives business, which closed last year. Fuller is on track to meet its integration goals, including the closure of several manufacturing plants, Owens says. “I think Forbo is a textbook case of executing [acquisition integration],” he adds.
Royal Adhesives & Sealants (South Bend, IN), which is owned by private equity firm Arsenal Capital (New York), has perhaps been the most acquisitive adhesives company in recent years. The company has rolled up several small adhesives firms since being acquired by Arsenal in 2010. Its most recent acquisition was Adhesives Packaging Specialties (Peabody, MA), in December.
Sources say that consolidation is likely to continue, slowly but surely. “It is a very long-term trend,” Owens says. IHS Chemical says that the global adhesives and sealants sector is “very fragmented.” It estimates the top dozen adhesives companies by sales value only accounted for 47% of global sales in 2012, which totaled about $42.6 billion. “Henkel is by far the leader, with nearly 25% of the total global market,” Linak says. “Over 2,000 companies account for the balance.”
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