In the wake of the “Great Recession,” what are plastics’ prospects in 2010? Given the historic collapse of 2009, it will be by default a year of growth and one that faces lingering threats as well as opportunities. Most economists now agree that the longest recession the U.S. has endured since the 1930s bottomed out in June of last year. Before descending to that nadir, however, an ignominious list of lowlights was compiled.
• For the first time since World War II, global gross domestic product (GDP) declined in 2009, falling by 2.3%.
• North American auto sales dropped to levels last seen in 1982.
• Housing starts hit their lowest level since data began being recorded in January 1959.
• Some 8.2 million jobs were lost since the recession officially began in December 2007.
The impact on plastics was marked, according to Howard Rappaport, thermoplastics global practice leader at industry consultant Chemical Market Assoc. Inc. (CMAI; Houston, TX). CMAI estimates that global commodity resin consumption in 2009 totaled around 175 million tonnes, off approximately 8% from 2008’s total consumption of 190 million tonnes.
“From a macro perspective, the industry has experienced a contraction in terms of overall demand for most major resins,” Rappaport says. “In the more mature economies of North America and Europe, this has been evident in negative growth between 2008 and 2009. In the emerging economies of Asia, the Middle East, and Latin America, there has been a marked slowdown in demand growth from the higher double-digit rates experienced before the economic slowdown.”
V or W
Most economists believe the economy, at least in the United States, reached its bottom in June 2009. Going forward, the question, as we extricate ourselves from the pit we fell into, remains, “Will the climb be steady and unfaltering, resulting in a V-shaped recovery, or will that upward trend drop once again and result in a W-shaped, double-dip recovery?” For its part, CMAI sees a V more likely than a W in the economy’s future, with some caveats. “If there was a major spike in oil or gas prices in 2010,” Rappaport says, “that may ripple through the resin cost structure and push prices up to uncomfortably high levels, as we saw back in the summer of 2008.”
In determining the shape of the recovery, CMAI will consider several key metrics, including the pace and progress of major capacity expansions planned for the Middle East and the willingness of consumers in developed economies to reopen their pocketbooks. On the first point, Rappaport says that while there have been several plant startup delays, the majority of the investments are forging ahead and are expected to bring new resin capacity to the marketplace over the next 12-18 months.
On the latter point, to this stage the recovery that began in June 2009 has been fueled by government stimulus in developed countries and relatively uninterrupted growth in developing economies like India and China. CMAI and others say, however, that for a meaningful and sustained rejuvenation to occur, consumer spending will be key, particularly in developed markets. The U.S. traditionally makes up 25%-30% of the global economy, with two-thirds of its economy linked to consumers’ pocketbooks.
“One of the most important indicators as we emerge from the recession will be consumer spending,” Rappaport says. “Once the consumer gets back in the game and is more confident in spending his disposable income, this will create more consumption in the major economies of Europe and North America. These two regions will ultimately play a role in the longer-term recovery beyond 2010.”
According to the American Chemistry Council’s (ACC; Arlington, VA) 2009 Year End Situation & Outlook, U.S. consumer spending uncharacteristically contracted for two years in a row, shrinking by 0.2% in 2008 and 0.6% in 2009. Consumers will begin increased spending again in a limited fashion in 2010, lifting outlays by 1.7%, predicts the ACC, with 2.5% spending growth in 2011. After lifting spending by 1.6% in 2010, business spending is forecast to accelerate to 5.8% growth in 2011.
The difficulties of 2008 and 2009 for the plastics industry have resulted in a stress test of sorts for resin producers, forcing them to address their weaknesses or fall by the wayside. Rappaport describes the result as a “major shakeout,” where companies have not only changed ownership, but in many cases completely reoriented their business model. The new landscape: The Middle East emerges as a major exporter for several key commodity resins; smaller, older, less efficient operations in Europe and North America close; and perhaps even sites in Japan, Korea, and Taiwan could be shuttered, as the Chinese add domestic capacity to satiate their local needs. “Consolidation will continue,” Rappaport says, “and eventually there will be more assets in the hands of fewer companies.”
On the whole, the ACC reports that after investing $237 billion in new plants and equipment in 2008, the chemical business pared capital spending in 2009 by 3.9% to $228 billion. Going forward, the ACC anticipates a 10.1% increase in 2010 ($251 billion), with $284 billion invested in 2011. Fully 93% of the incremental investment will come in emerging markets from 2009-2014, with “noteworthy gains” expected in China, Africa, and the Middle East.
Those overseas capacity gains and contractions in U.S. production and exports have the ACC forecasting that the United States will run a $1 billion trade deficit in chemicals in 2011. In 2009, the country had a $2.4 billion chemicals trade surplus, with a $3.9 billion surplus forecast for 2010.
GDP to expand in the U.S., globally
CMAI estimates global GDP growth will average between 3.5% and 4% over the next three to five years, with Europe and North America registering between 2% and 2.5%. Countries like China and India will begin to pick up momentum and eventually reach annual GDP growth rates of at least 10%-12%.
As the ACC assessed the detritus of 2009, it also attempted to look forward, admitting that “forecasting at this juncture involves considerable uncertainty.” The association report states that the general consensus is the recession is definitely over and 2010 and 2011 will be marked by recovery. After shrinking in 2009, the ACC believes global GDP will grow by 2.8% in 2010 and 3.2% in 2011. U.S. GDP is forecast to expand at a rate of 2.6% in 2010 and 2011 after contracting by 2.3% in 2009. After jumping from 5.8% to 9.3% in 2009, U.S. unemployment is expected to lag the broader recovery and expand to 9.8% next year and still be at 9.3% in 2011.
The ACC cautions that continuing issues in the consumer sector and the need to work through imbalances throughout the economy mean that 2010’s recovery will be less robust than previous cycles, with the outlook for chemistry “somewhat muted.”
The massive investment in capacity in the Middle East and Asia could have far-reaching effects in 2010, with world-scale plants coming online at a time when any recovery demand for materials will be nascent at best. Because of this, CMAI is anticipating that operating rates and prices for resin producers could be anemic this year. “[CMAI] anticipates resin prices will soften in 2010,” Rappaport says, “which in reality may be good news for some resin buyers and bad news for sellers. The only question mark will be energy and its impact on the cost side of the equation.” The ACC forecasts that after chemical industry operating rates slipped to an average of 70.1% in 2009, they could climb to 78.5% by 2012. It’s an improvement, but still at a level that would suggest reduced margins.
The crucible of 2009, however, has also changed how resin producers operate. “There was a tremendous amount of discipline being exercised by many of the resin producers as they struggled with a weakened economy and softer demand,” Rappaport said. “This new discipline provided companies the opportunity to trim out excess cost, lower inventory levels, and recalibrate their business models.”
According to Europe’s association for plastics and rubber machinery manufacturers (Euromap), not unexpectedly, 2009 marked a sharp drop in demand after a record 2008. In an October 2009 press release, Euromap noted that although its members began feeling a decline in machinery demand in the final quarter of 2008, a 1.2% boost in production and 1.5% increase in exports lifted the year to record totals. In 2009, however, Euromap believed that overall production would fall by 22% to a total value of Ђ13.6 billion. Core machinery, which has a 62.7% share of Euromap’s business, was expected to contract by 30%.
Looking forward, Bernhard Merki, Euromap president and CEO of Swiss injection molding machinery supplier Netstal, said his group’s assumption is that the order decline has bottomed out, although financing remains an obstacle due to tight credit. “The industry expects an upward trend in time for K 2010 at the latest,” Merki said, referencing the triennial show that takes place this year from Oct. 27-Nov. 3 in Dьsseldorf, Germany. —Tony Deligio