Soft demand for capital goods in first half 2002 has weakened original- equipment (OEM) demand for seals, rings, and gaskets. Maintenance (MRO) demand for these items has also dwindled as chunks of U.S. industrial capacity have stood idle or gone underutilized in the past year. However, there's evidence that diminished MRO demand from the perspective of usage is being offset by the fact that investment-shy manufacturers have become more inclined to repair rather than replace their older machinery in the last year. That seems to be spurring along the aftermarket segment of the seals, rings, and gaskets business.

Unexpectedly strong demand for cars and trucks—due to rock-bottom financing deals and other big sales incentives—has been another big plus for both diversified producers of sealing applications as well as suppliers that service automotive customers exclusively. Motor vehicles are among the largest end markets for sealing applications and latest market estimates put car and truck sales on track to reach 17 million units in 2002 (off a smidgen from a record 17.2 million in 2001). Latest auto sales forecast for 2003 is a respectable 16.4 million.

Jerry Whitlock of EPM Inc., a seal maker in Stockbridge, Ga. (near Atlanta) says, "While others in the industry are saying they're off 30-40%, we are up 40% over last year." Whitlock attributes a good chunk of this growth to his shift from being a distributor to a maker of seals. "We no longer stock seals. We make them to order using the latest whiz-bang machines, which puts us in the 'instant' seal business." Instant seal-making technology, he explains, allows the company to economically produce "any seal within a certain size range." A big application for the technology, according to Whitlock, is making replacement seals for equipment (especially foreign-made equipment) where pricetags for aftermarket parts can be high.

Derek Feltner, marketing manager, for Parker Hannifin Corp.'s, O-Ring Division in Lexington, Ky., remarks that: "Demand for sealing products has fallen off in some areas, for sure." But overall, he says, business remains strong. "We are a company that serves a really broad industry base, so while we're experiencing lulls in some segments, there are others where activity is very high. The fact that we aren't concentrated too heavily on one market allows us to achieve growth in less-than-optimum economic conditions."

Long-range forecast from the Freedonia Group Inc. in Cleveland places the annual growth rate for seals and gaskets at 4.8% through 2005. That would bring the market total to $9.7 billion in 2005. "Slight improvements in motor vehicle production will help drive growth," Freedonia says. "In addition, gains will be supported by healthy aftermarket opportunities, a result of the aging and repair of equipment purchased in the 1990s economic expansion." Compared to the last decade, however, Freedonia says demand growth for seals and gaskets will be slower "largely because of a slowdown in production of many types of industrial machinery and electrical/electronic equipment that utilize gaskets and seals."

Freedonia does see a shift in demand to more high-performance products, including "advanced fiber gaskets, expanded graphite gaskets and shaft seals." Shaft seals are expected to continue replacing other products especially in integral rotary motion applications. Advanced fiber and plastic gaskets are expected to continue replacing more materials such as elastomers, felt, paper and cork.

Parker's Feltner notes that, "Seal manufacturers are still offering the standards—ethylene propylene terpolymer (EPDM), polytetrafluoroethylene (PTFE), nitrile and other sealing materials. But new applications with tighter tolerances, higher operating temperatures and tougher chemicals are ushering 'next generation' sealing materials." An example is Parker's Parofluor Series Advanced Perfluorinated Elastomers. Parofluor ULTRA is a new ultra-pure, high-performance material that resists a broad range of chemicals, and can perform in temperatures up to 608ºF/320ºC. Feltner says that Parker Hannifin has also developed the trademarked Integrated Piston, an all-in-one piston, bearing and seal for hydraulic cylinder applications.

"To some extent," Freedonia reports, "the continued move toward better-performing products will have a mixed impact on long-term growth, since the improved pricing opportunities for higher-end products will be offset somewhat by their extended useful lives."

On the supply side of the market for seals, rings, and gaskets, PURCHASING's exclusive leadtime data show a surprising 26% stretch in the past year on average delivery speeds for sealing products. But most of the increase occurred in the single month of June when there was a one-month surge (probably anomalous) in the percentage of buyers reporting leadtimes of six weeks or more. (Noteworthy is the fact that PURCHASING made a major revision to its survey methodology in that month). That said, there has been, in the past year, a subtle shift whereby the percentage of buyers reporting off-the-shelf availability for seals, rings, and gaskets has declined somewhat and the percentage reporting short delivery waits has increased.

Buyers suggest that most sourcing difficulties for the category are taking place on the MRO side of the business. For example, one buyer of seals for MRO suggests that sellers' cash flow requirements are causing them to "maintain lower inventories." Another buyer, also for MRO usage, suggests that, "As equipment ages, fewer replacement parts are being kept on warehouse shelves, so these parts are fabricated on an as needed basis."

Parker's Feltner notes also that: "The last year has seen a lot of mergers and acquisitions, and I think that has a lot to do with across-the-board delivery issues. In the wake of these acquisitions, companies are working to integrate business systems and product offerings, while they simultaneously answer the changing needs of the customer."

Noteworthy is that buyers purchasing seals, rings, and gaskets in large quantities for OEM applications report no substantial problems with supply. One says: "Leadtimes are approximately one week." Another buyer for OEM confirms that he has seen no evidence of longer leadtimes for these items.

With demand on the moderate side and supplies apparently plentiful, buyers aren't seeing much in the way of price action. A whopping 90% of seals, rings and gaskets buyers surveyed by PURCHASING in early September said they expected stable pricing for the coming thirty days with similar percentages showing up in the two prior months as well. Only 3% of buyers thought there was any reason to fear a price increase and the remaining 7% felt they might have some opportunity to push prices down. Feltner has observed this first hand. "Producers of seals have experienced price resistance in some industry segments over the past year. This resistance is due in part to global competition," he says.

Input from both buyers and producers suggests there is nothing terribly significant happening at this time on the materials cost side of the business that would inspire any significant price moves.

The Freedonia report says there are more than 500 companies manufacturing seals and gaskets in the U.S. alone. Five large diversified suppliers—Federal-Mogul, Freudenberg, GenCorp, Parker Hannifin and Smiths Group—dominate roughly one third of the industry.

Such a high level of industry fragmentation—set in a climate of slow-growing demand and ready product availability—would seem to make sealing products a prime candidate for achieving costs savings through demand aggregation and large leveraged buys.

Whether or not a company decides to buy seals, rings, or gaskets via reverse auction may be largely a function of volume. On the MRO side, it would mean putting together large enough market baskets of purchases to attract big, diversified manufacturers and/or distributors into the auction (no easy task). For OEM uses, the e-auction tactic may be more appropriate, especially where projected purchase quantities are very large, specifications can be locked down, and recognized standards (such as those from the American Society for Testing and Materials) can be applied to ensure a level playing field for product quality.

Still, Feltner, who has participated in several reverse auctions over the last year, remarks that, "[the auction] medium makes pricing the only real consideration for the buy. It doesn't always allow the buyer to quantify the value of support services that a good supplier can—and should—offer.

"The majority of our customers," Feltner continues, "know that seals—despite being classified as 'C' items—are some of the most important components in their end products. So when they choose a supplier, they consider that supplier's experience in material formulation, mixing, and manufacturing. They also consider the support and value-added services the supplier has to offer." Examples of value-added services include access to finite element analysis hardware and software, dedicated applications assistance, and on-site testing capabilities. "At Parker, we've spent years building the infrastructure to support the sealing product—at both the front and back end," Feltner says.

Buyers queried by PURCHASING tend to back up Feltner's view that seals, rings, and gaskets are more than price-only buys. A PM who buys seals for OEM usage remarks: "We use the same suppliers due to good service." Another OEM buyer says, "We consider quality of the product."

"Because the seals and gaskets I buy are production priorities," says one buyer for MRO usage, "my first consideration is the supplier's reaction to my needs. Price is still important, but it is clearly not as important as getting a seal ASAP. A few dollars savings for a seal could mean the loss of a few thousand dollars in production." Another MRO procurement specialist says, "If the supplier can give me the price, but will not be there if the seals, rings, or gaskets fail, then they are of no value to me."