White Paper on Hot Melt Adhesives

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Securing Hot Melt Supply:
Navigating the New Landscape of Adhesives Raw Materials

May 2011

Securing Hot Melt Supply:
Navigating the New Landscape of Adhesives Raw Materials

Securing Hot Melt Supply:

Navigating the New Landscape of Adhesives Raw Materials
A new business reality has emerged from the economic crisis. New trends are now challenging the pre-recession status quo. The adhesives industry is not immune to this shifting landscape. Hot melt adhesives, in particular, are being hard hit. Supply threats, both novel and resurgent, are altering the framework of hot melt adhesives’ raw materials supply. The supply of waxes, rubbers, tackifiers and ethylene vinyl acetate (EVA) is affected. Broad trends—rising oil prices related to upheaval in the Middle East and unexpected supply chain disruption caused by the recent earthquake, tsunami, and nuclear crisis in Japan—are changing the way business is being done around the world. Many industries are struggling to navigate this new reality. Forecasting oil prices is difficult at the best of times. Inject regional rebellions against entrenched leaders and rampant market speculation, and volatility becomes the norm. Meanwhile, the Japanese crisis is forcing businesses to reevaluate a treasured and, until now, highly efficient supply chain practice: Just-in-time may no longer be good enough. Other trends, like the unforeseen boom in shale gas exploration in the United States, offer lucrative growth opportunities to some sectors but are having serious repercussions for others. In particular, the abundance of low-cost shale gas feeds available to North American olefins crackers is changing the mix of products coming out of crackers. By choosing low-cost natural gas feeds instead of higher-cost feeds from crude oil, cracker operators effectively reduce the production of feedstocks used to make hot melt raw materials. Because there are no immediate alternatives to petroleum refining to produce these feedstocks, the industry must contend with a future of constricted supply and higher costs. Moving farther down the supply chain to specific raw materials used in hot melt adhesives, a complex interplay of supply, demand, fierce competition, and rising costs is buffeting many raw material streams. From weatherchallenged rubber harvests in Asia to a surging photovoltaic industry that requires ever greater volumes of EVA for solar encapsulants, the threats to supply are coming from many possibly surprising directions. This dynamic—broader business trends overlaid with raw material-specific supply threats—is creating an increasingly challenging supply environment for hot melt adhesives. It is forcing adhesives manufacturers to compete more intensely with other industries for limited supply, often by paying higher premiums to secure it. The situation isn’t expected to improve anytime soon. Understanding this emerging landscape of adhesives raw materials supply will help adhesives customers better plan for the potential disruptions and certain rising costs that are looming on the horizon.

Broad Trends: Oil Price Inflation
Petroleum underpins the modern world. Not only does it fuel industry and commerce, but it also forms the basis of a vast array of industrial and consumer goods, including adhesives. Many key raw materials used in the formulation of hot melt adhesives are produced by the refining and processing of crude oil and natural gas. Emerging trends affecting the refining and petrochemical industries, therefore, have a profound impact on the supply and cost of these adhesives raw materials. Crude oil prices hovered between $70 and $80 per barrel for most of 2010. In the recent past, this price level appeared to be a sweet spot for markets. OPEC producers were generally happy with the returns generated by $80 per barrel crude. According to Purvin & Gertz CEO Bill Sanderson, speaking at a March 2011 Chemical Market Associates Inc. (CMAI) conference in Houston, this price...
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