Blow Molding Remains Resilient

North American output of blow molded products expanded by 6% year-on-year during the first quarter of 2003, according to our Blow Molding Business Index. This growth rate is expected to be maintained through the remainder of this year, following a gain of less than 2% in 2002.

The Blow Molding Business Index is comprised mostly of markets for bottles, but also includes fuel tanks and industrial drums. Through the first quarter, virtually all types of blow molded products were on a pace for solid expansions this year. Output of high-density polyethylene gas tanks and industrial drums are particularly strong for the year to date, as are household chemical, pharmaceutical, cosmetics, and pvc bottles. The only market segment that is showing some strain is polypropylene bottles, which is off by 6% for the year to date.

Our forecast for continued expansion in blow molding activity is based on two crucial factors. The first is that resin prices will decline. Prices hit a cyclical bottom in the first quarter of 2002 and then climbed rapidly over the next four quarters. A cyclical peak occurred in the first quarter of this year, with some prices having increased more than 50% in the 12-month period.

High prices put tremendous pressure on bottle processors. In fact, material price increases were part of the reason why the Blow Molding Business Index has increased rapidly this year, as molders tried to build inventories ahead of rising materials costs.

But the Iraq war is over, and feedstock and energy prices are moderating. Resin prices started to decline in the second quarter, and our pricing models indicate that the trend will remain steady to downward in the coming months. There is still idle resin production capacity around the globe, and there are plans for more capacity to come on-line in the next few years. At current pricing levels, resin production should grow faster than sales in the second half of 2003. This will keep downward pressure on prices in the near term.

But the biggest factor that will help blow molders is accelerating growth in U.S. retail sales in 2003. After expanding at an average annual rate of 6% in the previous 10 years, total retail sales (excluding automobiles) in the U.S. slipped to 3 to 4% in both 2001 and 2002.

Sales of food and beverages fared slightly better, expanding by an average of 5% in the past two years. As conditions continue to improve in 2003, growth in all retail categories will accelerate. Our forecast calls for an expansion of at least 5% in total retail sales in 2003.

Asian economies suffer from SARS

After generally solid growth in 2002, most of the Asian economies are currently being hit by the Severe Acute Respiratory Syndrome epidemic. Thus, the most important factor in the outlook for the Asian economies is containment of the virus.

The importance of this issue to the Asian economies, particularly China, cannot be overstated. If the spread of sars is quickly and effectively brought under control, then the Asian economic outlook will gradually improve during the second half of 2003 and throughout 2004. If it continues to spread, it will have a strong negative effect on all of the region’s economies.

Prior to the epidemic, China’s economy was growing vigorously. The latest data indicate that China’s gdp expanded nearly 10% in the first quarter of 2003. This is largely due to the fact that the nation is rapidly developing into a global manufacturing center. Total industrial production jumped 17% in the first quarter compared to a year ago. The sars epidemic and high energy costs slowed domestic consumption in recent months, but China’s economy is export driven. Exports escalated 34% in the first quarter.

The latest data from India suggest that its economy was constrained by a severe drought affecting the agricultural sector last year. India’s gdp expanded less than 3% in the latest quarter, considerably less than the 6% in the preceding year. But this slowdown was largely due to an 8% drop in agricultural output. The manufacturing sector grew 6%, tourist-related industries registered an 8% rise, financial services ascended 8%, and construction activity increased by 7%. The overall economic outlook is encouraging, but problems with Pakistan continue to cast a shadow on long-term prospects.

The manufacturing sector in Japan is clearly mired in a recession. Its industrial production data are consistently declining due largely to weak exports, on which the country relies heavily. Weakness here will persist for several more months, as export demand from the U.S. and Europe will be lackluster in the short term, and as sars continues to curtail activity in Asia.

Computer market continues to rebound

While American businesses remain reluctant to invest in new employees and many types of industrial equipment, spending for computers continues to expand.

In the first quarter of 2003, non-residential investment in computers and peripheral equipment increased by 6% from the previous quarter, and it was up by 23% versus the same quarter in 2002. This rise is reflected in the latest data from the U.S. Federal Reserve Board. Through the first quarter of 2003, total production of computers was up by 14% compared to the previous year. Overall, U.S. computer production expanded by 15% in 2002.

Upward momentum in computer production is expected to be maintained for the rest of 2003 and into 2004. Economic conditions will gradually improve over the next few months and this will foster demand for all types of business equipment. Also, much of the equipment that was purchased in advance of the Y2K scare four years ago now needs to be replaced. For 2003, our forecast calls for a gain of 20% in business spending on computers. This will yield at least a 15% increase in total U.S. computer production.

Though this growth level seems robust compared to the outlook for most other sectors of the economy, it is actually below par for the computer industry. Over the past 10 years, total U.S. output of computers and office equipment has grown by an average of 27%/yr.

Nylon prices are stable

Market demand for nylon has gradually increased over the past year and a half, yet production levels have also been moderately ramped up. This means that the market has maintained a tight equilibrium, which reduces price pressures. Resin prices, thus, tend to be stable.

While prices for most types of resins increased steadily throughout 2002, with a sharp spike in the first quarter of 2003, the published price of nylon has been flat since the second half of last year. The price of nylon 6 hit a cyclical peak at the end of 2000, but is down by about 20% since then. Market demand for nylon will continue to recover gradually as the U.S. and global economy expands in 2003 and 2004, and this will put some upward pressure on prices. However, any increases for the rest of this year should be moderate.

The latest chart shows that the production curve has crossed the sales curve and is rising slightly faster. Accelerated production output will impede any near-term rise in the price of nylon, but the market will have to register a period of sustained sales decline before any downtrend in prices can be established.

The relatively low prices have dramatically increased appliance and other consumer-goods manufacturers’ appetite for nylon resins so far in 2003. Sales to film extruders and the auto sector also have posted solid increases this year. But sales to both electrical/electronics equipment manufacturers and wire extruders are substantially down for the year to date.