August 22, 2018 | Sourcing Strategy
Silicone is an important polymer that is used as a raw material to manufacture adhesives, sealants, lubricants, electrical and thermal insulation. The electronics, construction, automotive, medical and personal care industries are the core end users of silicone-based products. The global demand for silicone revived after the recessionary period, but its demand was the strongest in 2017 due to a strong production output in the construction and automotive sector. However, the global silicone shortage pushed up silicone prices by 20-30 percent since 2017.
Why the Tight Supply?
In 2018, the supply of silicone continued to remain tight, and prices of key raw materials — silicon metal and methanol — spiked by 20-30 percent and 20-25 percent respectively as compared to 2017. China is among the world’s largest silicone producers with a share of nearly 40-45 percent of the global production capacity, and any transition in either Chinese domestic consumption or capacity is likely to impact the global silicone market. In 2002, China accounted for only about 7 percent of the global silicone consumption, but its domestic consumption share stands at over 40 percent as of 2017, majorly driven by expanding end-user industries in China. Therefore, the high domestic consumption of silicone has impacted the export market. Additionally, China’s stringent environmental regulations, which forced Chinese silicone manufacturers to shut down their plants, are also a major factor driving up costs. Moreover, Chinese manufacturers have not been able to expand their production capacity due to a time-consuming permit process mandated by the Chinese government.
Meanwhile, Momentive Performance Materials shut down production at its German facility, and factory strikes at its New York facility during 2016–2017 due to environmental violations further impacted silicone production. In the past, silicone was sourced from Europe, but the plant’s shutdown, coupled with limited capacity expansion during the last 15 years, led to diminished export opportunities. Dominant silicone producers such as Wacker Chemie A.G., Elkem Silicones, Shin-Etsu Chemical Co., Dow Corning (now split into DowDuPont's Dow and DuPont units), and Evonik account for 80 percent of the silicone market, and these producers spiked silicone product prices citing higher costs of raw materials.
Moreover, the U.S. anti-dumping case resulted in higher import tariffs of silicon metal, which effectively doubled up raw material prices. The higher tariffs, in turn, affected U.S.-based silicone manufacturers, as about a major chunk of imports originated from Australia, and a significant portion from Brazil and Norway as well.
The Road Ahead
Buyers have been observing tight silicone supply since 2017, and this situation is expected to persist over the next two years, the 2018–2019 period. However, suppliers are undertaking investments to increase their production capacity. For example, supplier Wacker A.G. recently commenced work on developing a new silicone production facility in South Korea to produce silicone sealants and silicone elastomers for the construction and electronic industries respectively. Similarly, Dow conducted a feasibility study to propose an investment of silicones in the Middle East. The production capacity is expected to be ramped up toward the end of 2019 mainly in Asia and the supply situation should improve by the end of 2020.
Buyers are aware of the present supply situation of silicones and are closely monitoring inventory levels to meet the demands of their customers and minimize short-term disruptions. Supplier relationship management, open communication and pre-booking of new capacities have been the major activities from procurement to wade through the present tight situation. Some end users have also started investigating substitutes for silicones. Overall, manufacturers will continue to raise prices for silicone products in the short term to accommodate upswings in raw material and energy costs, and the situation will remain tight due to the ongoing global capacity crunch, high operating rates of plants and demand from sectors such as automobile and construction.