Outlook 2008: Housing and automotive hurting but exporters should feel no pain

Brace yourself: It will be a long, flat haul next year for the plastics industry.The worldwide economy will be hit with a one-two punch in 2008, buffeted by increased prices for both food and fuel. The growth generated through globalization will level off and sluggish economies will most likely experience recessions. Here’s a summary of what’s to come:• The U.S. automotive market will increase modestly in 2008. General Motors has been making strides to recover lost market share; Congressional legislation to raise or speed previously approved raises in Corporate Average Fuel Economy (CAFE) standards could change the face of the industry; and the major increases in output of automotive parts will take place in Mexico and Canada for the ever-expanding Asian transplants.• Home construction will rebound in late 2008, but will not return to the boom levels experienced during the first five years of this decade.• The weak U.S. dollar will continue to make the export market a viable alternative to producing for the highly competitive domestic market.• Expect to see the Chinese GDP growth level off to around 10% in 2008 and normalize to the high single digits over the next several years.The size and scope of economic changes will determine if they impact only small segments of the overall economy or if they have a far-flung ripple effect. Areas to watch include agriculture, energy, and medicine. One example is a disease that affected China’s pork industry in 2007:• If it remains local and short-term, it will be no more than a blip that will be absorbed into the broader economy. • If it spreads to other countries, it could create a worldwide pork shortage and contribute to the already looming specter of agflation. • If it crosses species to other farm animals, it could trigger food shortages and a serious recession. • If a deadly illness were to spread globally among humans, it could quickly set off a worldwide depression.OilThe U.S. Dept. of Energy’s Energy Information Administration (EIA) provides baseline data used by economists around the world. These data are also used globally by manufacturers when budgeting fuel expenses for the coming year. When the projections are overly optimistic (as they were this time last year), corporations end up dipping into their cash reserves and institutions implement assessments or raise taxes to cover the expenses.Given that crude oil prices hit a record-breaking high of $90https://www.plasticstoday.com/bbl in October, we are concerned that EIA estimates for 2008 are overly optimistic. The EIA projects 2008 crude oil prices to average $73.50https://www.plasticstoday.com/bbl for West Texas Intermediate Spot Average and $69.50https://www.plasticstoday.com/bbl for imports, an average cost of $70https://www.plasticstoday.com/bbl. It expects the average price to peak at $71.34https://www.plasticstoday.com/bbl in Q2 and drop to an average low of $68https://www.plasticstoday.com/bbl in Q4. We think these projections are off and recommend that you build in room for higher 2008 energy expenses, which will start with oil at an average of $90-$95https://www.plasticstoday.com/bbl, according to our estimates. Note that the EIA offered these words of caution: “Assuming continued tight global supplies, slower U.S. economic growth of 1.9% projected for both 2007 and 2008 compared to 2.9% in 2006 may be a mitigating factor for even higher crude prices.”In the EIA’s favor, the recent high oil prices have nothing to do with supply and demand; crude oil reserves are estimated to be at more than 4.1 billion barrels. The Organization of Petroleum Exporting Countries (OPEC) cut production back by 600 million barrels in 2007, but small changes in consumer behaviors are having a cumulative effect and have loosened the demand for oil.According to the EIA, the average price of a gallon of regular gasoline at the consumer pump (including taxes) peaked at $3.06 during Q2 2007 and dropped to $2.90 the next quarter. This data concurs with information collected by objective parties such as Lundberg Survey and the American Automobile Assn. The EIA projects 2008 quarterly gasoline prices to average $2.78 in Q1, $3.09 in Q2, $2.94 in Q3, and $2.69 in Q4.The EIA estimates that natural gas prices for industrial end users are at an average of $8.38https://www.plasticstoday.com/Mcf (thousand cubic feet). Looking at 2008 by quarter, the EIA estimates natural gas costs will be an average of $8.95 for Q1, $7.56 for Q2, $7.92 for Q3, and $8.98 for Q4. This could be good news for natural gas users as last year the EIA estimates in this sector were higher than actual expenses. Those who budgeted $6.90https://www.plasticstoday.com/Mcf only paid an average of $6.34.The critical factor for the United States is the low dollar value, which has, in part, contributed to the recent run-up in energy prices.ResinAccording to Kevin Swift, chief economist and senior director of the American Chemistry Council, global factors will play a big role in chemical prices in 2008 and this will have a ripple effect on resins prices. Swift sees two possible scenarios for 2008. The first, which most economists and business owners are hoping for, shows the U.S. GDP hovering at a 1.9-2% growth rate. This is what Swift calls a “soft but rocky landing.” There would be mild cutbacks but no widespread shutdowns.The other alternative is that the economy doesn’t land, but continues to fall. Swift echoes concerns we published in October 2007 IMM (immnet.comhttps://www.plasticstoday.com/articleshttps://www.plasticstoday.com/2007https://www.plasticstoday.com/Octoberhttps://www.plasticstoday.com/3377) that a global event (such as agflation or soaring fuel prices) that affects a large market such as China, the United States, or the EU could trigger a serious downturn. If a serious recession hits in 2008, the plastics market could shrink by 30% or more. Swift agrees that both government and civilian leaders will avoid any type of crisis until after the summer Olympics, but come fall 2008, all bets are off. The global marketWe anticipate North America’s molding economy to sputter in 2008 with low growth. The continued push to take advantage of a weak dollar and export more manufactured goods is the only area with clear opportunities. China, Japan, South Korea, and Taiwan will all be solid export destinations for U.S. goods. For example, demand for American goods in South Korea more than doubled in 2007; we expect demand there to grow by at least 8% in 2008.The risk of recession is very high and could be triggered by any of the factors previously mentioned. Expect to see the Federal Reserve continue to try to avert a recession by adjusting interest rates, but that may change as inflation rises. Remember that in most cases government initiatives can only tweak the economy, not make substantial changes.The surprising economic growth seen in Europe in 2007 will slow in 2008. France, Denmark, and Hungary are the only European nations projecting GDP growth in 2008. Germany, which was a growth leader in 2007, will probably fall from 2.7% in 2007 to 2.2% in 2008. Spain is bracing to drop a full point, Britain is projecting an 0.8% drop, while Austria and Greece may face 0.6% decreases.Growth in Asia is expected to stay strong in 2008. China’s growth will begin to level off, but that is actually a sign of a healthily maturing economy as opposed to the runaway growth of an emerging market. China may have had a $144 billion trade surplus with the United States in 2006, but it had a $69.8 billion trade deficit with the rest of Asia the same year.We anticipate that Chinese imports into the United States will slow in 2008 thanks to the combination of the weak dollar and shifts within the retail industry. Murmurings are that that major retailers Wal-Mart and Target are checking out facilities in other low-cost-labor markets such as India as an alternative to China. The 2008 U.S. elections also may prompt Congress to push for stricter currency and product quality controls. Every mention of these issues causes tension between Chinese and American officials. Companies wanting to stay out of the crossfire may be seeking business partners elsewhere.Here’s the market breakdown:Computers. U.S. molders have found a solid niche in handing short-run, sophisticated molding jobs. A sluggish dollar makes complicated molding in the United States more economical in the world market and will increase the number of these specialty jobs sent to the U.S. from points around the globe. This is an area that will increase in 2008 and should hold steady as long as the dollar remains weak. We are defining a short run as less than 160,000 parts—a small number compared to the massive molding runs of plastic components for computers, scanners, and printers one typically sees in Asia. Rapidly changing computer technology and consumer demand for attractive, ergonomic design are driving demand for short-run production. It is there that molders can combine rapid prototyping and fast mold design and machining (increasingly using aluminum molds) with proximity to molding locations.One molding house in Texas managed to produce the outer housing of a desktop personal computer from concept to shipped product inside of eight weeks, allowing the manufacturer to rush a new model to market in a very short time. But understand that the molded housing was then exported to Singapore to be matched with the “guts” of the computer (manufactured in China) and then shipped back to the United States—a choice that added four and a half weeks to the whole process.Construction. Expect to see the housing market start to turn around during the second half of 2008. According to Bernard Markstein, senior economist and director of forecasting for the National Assn. of Home Builders, the index that tracks builders’ perceptions of conditions and expectations fell to its lowest ever in October 2007. The good news, Markstein explains, is “we are looking at housing starts to bottom out in the second quarter of 2008 and then start to rise.” While the new home boom is clearly over, any pickup in the home construction market would be an advantage to plastics, even if it hits late in the year.Automotive. General Motors and Toyota will continue to duke it out to win the treasured title of No. 1 automaker in 2008. While 2007 brought seesaw sales between the two, the healthy competition was a great morale booster in Detroit. GM saw double-digit jumps in third-quarter sales in Europe (15%) and Asia-Pacific (16%), and record-breaking 20% increases in Latin America, Africa, and the Middle East. These are the types of numbers that light the fires of enthusiasm under staffers and propel companies forward.In addition, the dollar’s decline makes American-made cars more attractive both abroad and domestically. As long as a recession is avoided, we anticipate automotive sales to inch up throughout 2008.One area to be watched for a long-term forecast is the possibility of raising CAFE standards. They’re currently set at 27.5 mpg for passenger cars and 22.2 mpg for light trucks—24.6 mpg combined. Proposed legislation calls for an increase in standards to 35 mpg combined (42.1 mpg for cars, 28.7 mpg for trucks) by 2020. Should this or similar legislation pass, it would require the entire automotive industry to rethink vehicle design and construction. While 2020 sounds far off, consider that designs for vehicles featuring fuel cells, hydrogen-powered engines, and hybrid machines began nearly 20 years ago and have still not been perfected.In auto accessories, Thailand is the current hot growth spot for production; the country enjoyed a 29% rate of increase for this segment in 2006 and grew another 24.2% in the first half of 2007. The Thai Dept. of Export Promotion hopes to ride the wave of growth into 2008 by hosting the Thailand Auto Parts & Accessories (TAPA 2008) show on April 23-27, 2008. Being competitive in manufacturing auto parts and accessories is often more dependent on having technology and efficiency in place than on cheap labor. Most North American molders have highly automated shops. Combine know-how with a weak dollar and bargains on ocean shipping from the United States to Asian ports and we have an area of opportunity for North American molders to compete with their Thai counterparts in 2008.Household appliances. The U.S. household appliances industry peaked at $22.5 billion in 2006, leveled off in 2007, and is expected to stay relatively flat in 2008. According to the Assn. of Home Appliance Manufacturers (AHAM), energy efficiency is the greatest regulatory and consumer trend shaping product design and innovation, and will continue in 2008 and for years to come. Energy-efficient models are the one area in which AHAM continues to see appliances being replaced prior to the end of their useful lives.Telecommunications. Expect to see another boom in telecommunications devices in 2008 as Korea’s WiBro technology catches on. WiBro, developed by the Korean government and local telecommunications companies such as Samsung, is a variant of the WiMax wireless Internet standard and has been approved as a global standard by the International Telecommunications Union (ITU). It is designed to provide wireless broadband Internet connections to mobile users. While this is still a market with a lot of turnover, it is also one that is extremely difficult to penetrate. We do not predict that the spread of WiBro will offer new opportunities to molders.Consumer electronics. While final numbers are not in, the Consumer Electronics Assn. (CEA) projects that consumer electronics will hit a record-breaking $48.1 billion in Q4 2007 sales—a 7% increase over 2006. “Consumer electronics will be the shining star of holiday retail sales, accounting for 22% of all gifts given,” says CEA economist Shawn DuBravac. “Two of the top five items on adults’ holiday wish lists are consumer electronics, and four of the top five items on the teen list are CE devices. Holiday sales will be particularly jolly for the video game category (hardware and software), laptop computers, and the endless array of accessories available for your favorite product.”Medical devices. This is a market segment in which North American molders have traditionally felt safe, thinking they were immune from outsourcing to China. That may change in the long term as more Chinese companies acquire sophisticated equipment. In the short term, however, it is unlikely that Western companies will shift their medical device production to China thanks to the perception of poor quality control. Both the design and manufacturing of medical devices are regulated in the United States and Europe, and it is unlikely manufacturers would outsource to China unless there was confidence that the final products would live up to regulatory requirements.Packaging. According to the World Packaging Organisation, the global packaging market was worth $519 billion in 2007, and is expected to grow to $541 billion in 2008. Plastic packaging accounts for roughly 34% of the total market. The U.S. market comprises just more than 25% of the total world packaging market, and is projected to be $130 billion in 2008.Author Lisa M. Pellegrino (lpellegrino@therepton group.com) is a senior advisor at The Repton Group LLC (New York, NY).Don’t miss these Web-exclusives:Click here to download a spreadsheet with the following data:• Long term: U.S. energy prices by sector and source, 2004-2011• Short term: U.S. energy nominal prices, 2004-2008• International energy outlook by region, 2004-2030• Institute for Supply Management’s manufacturing and nonmanufacturing surveys, September 2007• U.S. exports and imports by country, 2004-2006• New privately owned housing units by region, 2006-2007