Signs of recovery

Inflation is at record highs, energy and gas prices are volatile, supply chains have been suffering severe disruption — all of which have been compounded by geopolitical tensions that are continuing to add to the uncertainty. There are still lingering fears of a recession and key end-use markets for adhesives and sealants — namely construction and automotive — will inevitably be affected.

For Dr. Bill Conerly, economist and consultant of Conerly Consulting LLC, current conditions have improved, but there are still concerns about the outlook later in 2023 and into 2024.

“For most businesses, it’s actually not been a particularly rough period,” he says. “Yes, inflation is high but revenues have, in any cases, been higher. Sales have been good in most sectors. People are facing much the same challenges as last year but lesser.”

“There are some sectors that haven't been great and they're the most interest sensitive sectors such as single family housing. But overall, things have been pretty good.”

The dollar has recently rebounded and energy costs are starting to ease. Even the supply chain issues seem to be improving, adds Conerly.

“Some of the statistical measures suggest it's about in line with long run averages, but I think people are perhaps more attuned to supply chain problems and pay more attention to them than they did five years ago.”

Port congestion, shipping issues, rail disputes, and driver shortages have beset orders and deliveries over the past few years, resulting in lengthy lead times and soaring costs. The supply chain woes have touched every business and presented significant challenges, which has required careful planning and a willingness to adapt to new ways of working.

“The supply chain is looking better, without a doubt, but we have more and more businesses that are still nervous about its fragility,” notes Conerly.

“I'm seeing companies holding more inventory. It's unclear whether these are finished goods or raw materials, but the inventory-to-sales ratios are higher. Sometimes that happens early in a recession because companies make product they cannot sell, but I think this time round the companies are moving from ‘just in time’ to ‘just in case’ deliveries. For decades now, we've been seeing companies run their inventories leaner and leaner, and now they’re changing their mentality.”

Hiring has also become more problematic, he says. During the pandemic, the labor force bore the brunt of multiple lockdowns, social distancing restrictions, and the enormous financial pressures placed on businesses.

Some people were unable to work, some were too afraid to. Others seized the opportunity to leave the workforce entirely and retire.

At the start of this year, U.S. job market figures showed a 50-plus year low in terms of unemployment levels. The labor market remains tight and some employers are struggling to find suitable candidates for empty roles, says Conerly.

“Right now, if you’re the person looking for a job, things are pretty rosy — but if you’re looking to hire people, it’s not so good,” he says. “Hiring is easier; it’s still tougher than what we’re used to, but it’s not as tight a labor market as it had been.”

“I am seeing more and more companies saying they’ve been able to find the people they need but, of course, it’s harder for those looking for the more technical, specialist positions. Things will continue to get easier but looking through to 2030, we’re in a very long term tight labor market with baby boomers retiring and the next generation being smaller.”

Firm foundations

Building and construction remains one of the major markets served by adhesive and sealants. However, the combination of rising home prices and high mortgage rates have dented demand for house purchases, with the home improvement segment also suffering because of tightening household budgets and the ongoing cost of living crisis, says Conerly.

“We’re now starting to see the effects of the Federal Reserve tightening and after a while, six months or so, you start to see ripple effects where people may be trimming their spending — and then you have sectors that are not particularly interest sensitive cutting back. Those ripple effects would affect DIY and home improvement projects.”

“Home construction will continue to be soft this year,” he suggests. “Mortgage interest rates are not as high as they have been, but house prices are still very high. They've come down a little in the last few months, but by my calculation they're still running about 25% above trend. The bright spark here though is remodeling and renovation.”

“I think multi family, including multiple units and duplexes, will decline as well, but it will be on a longer lead time and move more sluggishly. Net, I think we’re going to see reduced demand for construction related products.”

Driving demand

The automotive industry — and specifically electric vehicles (EVs) — provides many potential applications for adhesives and sealants producers, but activity is also being dampened somewhat because of the prevailing market conditions.

“There’s talk that dealers are worried consumers are looking at higher interest rates for financing their purchase. Car prices have gotten really high, but I think there’s some pent up demand for new car sales and that prices will come down to get them moved,” says Conerly.

“The car market has suffered in terms of units sold because of the supply chain problems. With less supply, people have been paying over list price for popular models, which is really unheard of. As supply problems diminish, car volumes will at least stay level and probably rise. More volume will help those selling adhesives and sealants into the car market.”

Although EVs still represent only a relatively small portion of the total car sales, demand is slowly accelerating — opening up many new applications for adhesive and sealants suppliers in the future.

A looming recession?

Market fundamentals may be improving but consumers are still spending less in these tough times. For now, uncertainty remains. Business leaders would do well to now start putting contingency plans in place so they can weather the storm and capitalize on any opportunities that arise, says Conerly.

“I do believe we’re headed for a recession, starting maybe late 2023 or early 2024. That’s what I said last fall at the ASC Leadership Conference and it still seems right in line,” he says. “We had a good second half of 2022 despite the higher interest rates, but I do think the chickens are going to come home to roost and we’ll soon have a recession lasting maybe 6-9 months.”

“As we go into a recession, I always advise my clients to start planning on how to take advantage of it,” adds Conerly. “The early stages of a recession are probably a little too early to be expanding, but it’s the right time to identify what you want to do. That could be buying another company, expanding facilities, entering new markets, or hiring people.”

Andy Brice

Half the cars sold in the U.S. will be electric by 2030, according to goals set by President Joe Biden.

Various incentives and initiatives are already in place to facilitate the move of electric cars from high-end market to mass production — although limited charging infrastructure and high battery prices could slow that transition.

But whether this ambitious target is met or not, the burgeoning electric vehicle (EV) market will certainly enjoy substantial growth this decade. And that’s great news for the adhesive and sealant sector because of their many and varied applications in vehicle bodies, interior components, and the battery packs themselves.

The automotive sector is already one of the biggest end markets for adhesives and sealants. Applications vary from joining components and holding together body panels to providing sound and vibration attenuation and protecting car circuits.

The value of adhesives used in light vehicle components amounted to over $2 billion in 2020, according to data provided by strategy and research consultancy ChemQuest.

This figure has likely increased in 2021 and 2022 as demand for new vehicles continues to grow after the slowdown seen during the COVID-19 pandemic.

“Adhesives and sealants play a critical role for the safety, appearance and performance of every vehicle on the road,” says Marc Benevento, President of Industrial Market Insight. “It goes even further for EVs because they have been so important in the development of the electric powertrain technology.”

Adhesives and sealants are used in the battery packs, as well as the electric motors that power EVs. Thermally conductive adhesives, for example, help the cooling