Disruption to production of a vital chemical shows the fragility of some of the links in the global automotive component supply chain.
IHS Global Insight Perspective
A explosion and fire at the Evonik plant in the city of Marl, Germany, on 31 March has left the global automotive industry potentially facing a severe shortage of a resin that is used in the manufacturing of brake and fuel lines.
The shortage could particularly hit production in North America and Europe, with German OEMs particularly relying on resin production at the Evonik plant. The US OEMs and suppliers have scheduled a meeting for today (17 April) to discuss the potential impact of the shortage.
Although the major OEMs are not publicly panicking yet about the shortage of Nylon 12, the situation is being monitored very closely indeed. The industry has become adept at responding to component supply disruptions as we have seen as a result of the natural disasters in Japan and Thailand last year, but there is no doubt that this issue is being taken very seriously
The global automotive industry is bracing itself for a potential severe disruption to its global component supply chain after an explosion and fire at a chemical plant owned by Evonik industries. The incident halted the production of a polymer that is used in the production of vital components such as fuel and brake lines. According to Bloomberg and Associated Press (AP) reports, an explosion and subsequent fire at the Evonik plant at Marl, Germany on 31 March killed two employees at the plant and halted production of a chemical known as CDT—a key ingredient in a nylon resin called Nylon 12. This in turn is a key component used in automotive fuel and brake lines. The Bloomberg report cited a letter by the Chairman US automotive components supplier TI automotive to its customers; in the letter William Kozyra said, "The shortage of the resin may impact the production of these components in the next few weeks". The letter added, "The shortage is real and immediate… The possibility of production interruptions at some of your facilities in the next few weeks is high." The US automakers and supplier industry have arranged a meeting in Detroit today to discuss the potential disruption to the components supply chain caused by the explosion. The meeting will involve up to 10 OEMs and an even larger number of suppliers, according to the AP report. As well as the US industry there is potential for widespread disruption to all global production networks, although Western Europe and specifically German production looks potentially vulnerable.
Paul Blanchard from IHS Chemical has also outlined the potential issues at hand in a research note. "Nylon 12 production is greatly reduced globally by an accident at Evonik. The material is essential to many automotive fuel systems. OEMs and their Tier 1s may see production interruptions as a result. The duration of the nylon 12 shortage is uncertain at this time. OEMs are canvassing their supply chains to identify risks, available inventories, etc. Some alternate materials are available but must be tested and approved prior to substitution. In the last two years growth in demand for nylon 12 in solar panel encapsulation and backplate structures caused the supply to become very tight and at times the material has been available only at high prices. Given the tight supply situation Evonik expanded nylon 12 polymerization capacity at Marl in Q4 2011. However, the high prices have motivated a search by automotive tubing suppliers for alternative materials. In recent months tubing manufacturers have been qualifying alternates and in some fuel related applications nylons 6,10 or 6,12 have been tested and specified as replacements.
"Evonik's force majeure declaration of April 2 refers to reduced deliveries of nylon 12, their intention to restart production as soon as possible, and that it was not possible to evaluate the outcome of the situation at the moment. On April 10, Arkema, who also produces nylon 12, declared force majeure for their European operations since they rely on some purchased CDT. Together Evonik and Arkema account for about half of the world's capacity to make nylon 12. We do not have an indication yet on how drastic the reductions in nylon 12 shipments will be but it is likely to be serious. The tubing converters in North America have begun to issue force majeure declarations of their own this week. It is expected that restarting Evonik's CDT operation is 6 to 8 months away. The ability of Evonik and Arkema to find alternate sources of CDT is very limited and it is doubtful that the CDT shortage can be made up. In the short term auto and truck production will be affected. The force majeure declarations allow OEMs to substitute materials on a fast-track basis in such cases if they are satisfied that the new materials are suitable for use in the application. It appears we will be seeing some of this substitution activity now."
Outlook and Implications
As things stand, the situation is extremely fluid and there are more "unknowns" than "knowns" at the moment. It is likely that there will be more clarity on the situation following the meeting between the US OEMs and suppliers that is schedule to take place in Detroit today. The industry has proven itself to be increasingly adaptable to disruption to the supply network, as we have seen following the natural disasters that struck Japan and Thailand last year, which had a significant effect on aspects of the global automotive industry supply chain. However, from what we can tell there appear to be few alternatives in the industry to Nylon 12 at the moment although alternative materials and suppliers are being sought. One of the main problems is that although there are other suppliers than Evonik that make Nylon 12, the key ingredient of CDT was made by the stricken Evonik plant, and Evonik was a supplier of the chemical to other nylon resin manufacturers.
Michael Robinet, Managing Director for industry, Michigan, IHS Automotive Consulting said, "This could be very significant. They're certainly looking very hard at substitutes. But if there were easy substitutes, they would have been thought of already." Until now OEMs have not cut down on production but are monitoring their supply chains. Toyota spokesperson Mike Goss said, "We are currently assessing the situation in North America. Until that assessment is complete, any impact on our production is unknown." Chrysler spokesperson Katie Hepler said that the company is "monitoring the situation… At this time we do not anticipate any production impacts." Honda and Ford have made similar statements.