The global economy has sent a mix of signals through the middle part of 2013. Worldwide economic growth was reported by the International Monetary Fund (IMF) as +3.1 percent, the same as in 2012, and both 2013 and 2014 forecasts were reduced by -0.2 percent. U.S. growth was reported as +1.4 percent for the year and +1.7 percent for the second quarter, versus +2.8 percent in 2012. Forecasts for most of the world’s major nations, including the U.S., the Eurozone and China, were reduced from the previous (April 2013) forecasts. China was said by Deloitte to be “faltering” and to have “instability in (its) banking system.”

But, European economic growth for the second quarter of 2013 was reported at +0.3 percent by the European Commission. Germany led at +0.7 percent with France at +0.5 percent, ending 18 months of recession. In China, “faltering” or not, forecasts remain in +7.7 to +7.8 percent range.

Even in the Eurozone, however, most southern European nations remain in recession. Meanwhile, Pacific Investment Management Company (Pimco) said that it saw a 60 percent chance of another global recession within two to five years.

Against the backdrop of global recession since 2008, however, mixed signals represent an improvement. Markets are responding to the only modestly good news with enthusiasm on several fronts. Consumer confidence is reported to be particularly high in the U.S. and France, and the Dow Jones Industrial Average (of the New York Stock Exchange) is at an all-time high near 15,000 despite lackluster underlying economic growth.

But, economies remain fragile and growth will continue to be slow by historical standards. Still, global growth of +3.8 percent, up from +3.1 percent, is forecast for 2014, with the U.S. moving from +1.7 percent to +2.7 and Europe moving from -0.6 percent to +0.9 percent.

On the demand side, economic growth is a double-edged sword. Increased demand may lead to higher prices for crude oil, but it may also lead to an increase in the global capacity utilization levels of ethylene crackers. This would provide more petrochemical by-products such as propylene, crude C4s and pygas for consumption in various markets.

Energy Markets

Recent increases in the price of oil—and the forecast of a continuing run-up—are based not only on the expectation for increased demand but also on concerns about the supply side (See graph). Now one can add Syria alongside Egypt to the list of places where political unrest could spread to neighboring countries and lead to a disruption in the supply of oil. Egypt’s Suez Canal and Sumed (Suez-Mediterranean) Pipeline are important strategic routes for oil shipment, with about 3.8 million gallons per day flowing from the Middle East to Europe. There is no upside to continued unrest in either Egypt or Syria.

The Weather Report

In addition to the supply/demand developments in the energy and petrochemical markets discussed above, short term supplies of various petrochemical products can be significantly affected by the weather. So far, 2013 has been relatively quiet for the Atlantic and US Gulf Coast with only 10 named storms (tropical storms/hurricanes) through September which is the peak month for the Atlantic hurricane season. Meanwhile, several named storms (typhoons) have hit mainland China, but fortunately there has been no major impact on the petrochemical industry.

Wet weather is causing some supply concerns both in North America and Asia. Last year it was drought that reduced yields and increased prices of U.S. corn and soybean crops. This year, wet weather delayed planting, which is expected to have the same effect but to a somewhat lesser degree.

In Asia, there has been a 50 percent price increase in gum rosin prices since July based on speculation that wet weather may hinder the China gum rosin harvest. If the harvest proves to be disrupted for only a short time, there should be some downward correction in pricing in the near future. This downward pressure due to an improving supply should be offset by growing demand from the slowly recovering global economy. Also, heavy monsoon rains in India are hindering the natural rubber harvest.

n Economic activity is picking up

Markets Anticipate an Increase in Economic Activity

Adhesives Raw Material Report

GLOBALSeptember 2013

WTI prices have increased approximately 9 percent and Brent approximately 3 percent in Q2 through mid-August.

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n Petrochemical supply/demand stable

n Supply Issues Snapshot

Petrochemical Feedstocks Supply/Demand Mostly Stable, But TightMost petrochemical feedstocks have been relatively stable over the past quarter, with the exception of butadiene Still, the long-term supply/demand outlook for ethylene by-product petrochemicals remains tight.

• Ethylene—the global average price is up about 1.6 percent in the past quarter, based on increasing demand.

• Propylene—the global average price is up about 5 percent based on stronger demand and weak supply due to the proliferation of light cracking.

• Aromatic petrochemicals—the global average is down about 3.5 percent on weak worldwide demand.

• Styrene—the global average is down about 1 percent though demand is improving.

• Methanol—the global average is down 1 percent based on soft demand.

• Butadiene—the exception to the rule, as the global average price unexpectedly has dropped 39 percent, based on very weak demand from the tire industry and some new recovery capacity in China.

The Longer-Term Outlook for Ethylene Longer term, total global ethylene production capacity is growing at about 4 percent per year. About half of that, mostly in China, uses heavy feedstocks. The other half uses light feedstocks which produce only about 15 percent as much petrochemical by-product as the heavy feeds. So while ethylene production is expected to grow at 4 percent per year, the production of petrochemical by-products is growing at a lesser rate, while demand for those by-products is also expected to grow at about 4 percent per year.

Further, if demand lags the anticipated growth rate of 4 percent, then it is likely that new capacity programmed for 2017 and/or 2018 will be postponed or it simply will not come online.

In short, the anticipated growth in ethylene production capacity is not sufficient to meet the projected growth in demand for key adhesive feedstocks including propylene, butadiene and resin oils. The supply/demand balance for these materials will remain tight for the foreseeable future.

The Automotive Industry The automotive industry is a major user of many petrochemical derivatives that are also of importance in the adhesives industry and, as of today, the auto industry is experiencing the same mixed signals as the global economy generally.

New car production is up. U.S. sales are higher than pre-recession levels. China’s new car production and sales during June 2013 were up by more than ten percent over the same month last year. As a result, automotive manufacturers are consuming more isocyanates and polyols for foams and adhesives.

On the other hand, the global tire industry is very weak due to high inventories of tires in both the new vehicle and replacement markets. So, demand for butadiene and isoprene by the tire industry is very soft.

Meanwhile, more and more vehicles are higher mileage models that use smaller tires and less rubber. The industry is also engineering lower friction tires that last longer. So demand for butadiene and isoprene by the tire industry may never be as strong as it once was.

Butadiene and Isoprene Despite weakness in the tire industry, butadiene will remain volatile. Almost all butadiene comes from ethylene crackers, and so the advance of light cracking significantly limits the global supply. Prices are currently too low to justify substantial on-purpose production of butadiene. So while on-purpose production is expected to double over the next three to five years, in 2017 more than 90 percent of butadiene will still come from ethylene crackers.

Isoprene prices, by way of contrast, remain high compared to butadiene—high enough to support on-purpose production—more than 50 percent of isoprene production is on-purpose, mainly in Russia. The on-purpose economics is setting the cost floor. At the same time, additional isoprene recovery capacity has come on stream in China. So the supply/demand balance is improving, and therefore isoprene should be much less volatile than butadiene going forward.

GLOBAL Raw Material Report: September 2013

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A Closer Look

Global Response to the Supply Chain H.B. Fuller navigates raw material challenges to help our customers succeed. Our Sourcing teams collaborate globally to develop and implement strategic sourcing plans. By regularly evaluating both regional feedstocks and global events, we leverage our global supply chain to balance materials across our markets —in accordance with regulatory requirements. This ensures stable supply at the best value to support customers for their regularly planned requirements.

H.B. Fuller Sourcing also works closely with our technology group to evaluate both new sources of existing materials and new materials that guide technology development to support innovation and enable sustainability objectives.

Find more information by region:

hbfuller.com/north-america

hbfuller.com/latin-america

hbfuller.com/eimea (Europe, India, Middle-East and Africa)

hbfuller.com/asia-pacific

Adhesives are compounded products, typically containing more than one raw material. Overall adhesive cost trends do not follow any one individual raw material.

Reactives

Methylene diphenyl diisocyanate (MDI) is an adhesive raw material market to watch. Supplies of MDI, which account for 61 percent of all isocyanates, may tighten. This is due to demand growth in their traditional automotive and construction markets, and from their displacement of phenol formaldehyde resins in the manufacture of wood composites.

MDI producers also are working to further penetrate the wood composite market by displacement of urea-formaldehyde resins. If successful, the demand for MDI will increase further, bumping up against a finite source of supply.

Reactive (two-part) adhesives more generally are expected to remain under pressure due to tight supplies of aromatic petrochemicals. Isocyanates and polyester polyols are derivatives of these, and demand from the automotive and construction industries is expected to increase. Polyether polyols are also expected to rise, due to a relatively high propylene cost and to increased demand as an alternative to polyester polyols.

Water-Based Adhesives

Polyvinyl acetate (PVAc) and vinyl acetate/ethylene polymer (VAE) water-based products are expected to remain relatively stable for the rest of 2013, based on a balance of supply and demand, though increased pressure from feedstock costs is anticipated. VAE supply/demand, which recently has been tight, is expected to ease. With butadiene prices down, if only temporarily, demand for VAE as an alternative to styrene-butadiene rubber (SBR) has eased for some applications.

Plasticizer costs may rise, however, as aromatic (toluene and ortho-xylene) supply chains remain tight.

Hot Melt Adhesives

Many Hot Melt Adhesive (HMA) products, including Hot Melt moisture cure (HMMC) products, should remain relatively stable. But HMMC products based on high polyurethane (PU type) content are expected to remain under pressure, due to tight supplies of aromatic petrochemical feedstocks and the resulting impact of these on isocyanates and polyester polyols.

Tackifying Resins: A Complex Picture

Tackifying resins present a particularly complex supply/demand scenario because of the multiple interdependencies among their various forms. Tackifiers, both hydrogenated and non-hydrogenated, are made from resin oils from ethylene crackers and also from such natural sources as terpenes and rosin acids

Hydrogenated hydrocarbon (H2HC) tackifying resins have been quite volatile in the past, due to constraints in hydrogenation capacity. Some of this volatility should ease in the future due to new isoprene extraction capacity in China. But this new capacity is being offset somewhat by new and competing uses for hydrogenated resins and their feedstock resin oils in many different markets.

Key among these is demand for resin oil dicycolopentadiene (DCPD) feedstock for unsaturated polyester (UPR) and ethylene propylene diene monomer (EPDM) rubber, both in the construction market. The construction market continues to lag, but when demand returns it will expose continuing constraints in the supply of resin oils. The construction, adhesives and other markets also compete with the gasoline pool for C5 and C9 resin oils.

Forecasting supply/demand of hydrocarbon resins, both hydrogenated and non-hydrogenated, is exacerbated by the ability of some users to shift between hydrogenated and non-hydrogenated resins in many applications. Many have shifted from high performance hot melt adhesives (HMA) based on H2HC resins to other adhesives as a result of the volatility of these resins. It remains to be seen if and when and how many will come back to H2HC resin-based HMAs if that volatility is reduced, as expected.

This report is published by H.B. Fuller based on industry knowledge and opinions, in-house research and publicly available news sources. While we believe it to be accurate when published, no guarantee of accuracy is made. © H.B. Fuller Company, S RMR 09/2013

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Supply Issues Snapshot

GLOBAL Raw Material Report: September 2013A Closer Look