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High Resin Prices Crimp Blow Molding Demand

February 28, 2003

6 Min Read
High Resin Prices Crimp Blow Molding Demand

The blow molding market experienced a marked deceleration in the second half of 2002 but is expected to rebound in 2003. Our Blow Molding Business Index registered 1% growth in both the third and fourth quarters of last year versus the same periods in the previous year. For 2002, North American blow molding output eked out a 2% gain. In 2003, retail sales growth will combine with a moderate decrease in resin prices to help increase total molding production by at least 6%.

Though the pattern in blow molding data from the second half of last year correlates with slowed growth in the U.S. economy, the 1% growth rate was below the overall average. This was due to the sharp rise in resin prices in the second and third quarters of 2002. The blow molding data are dominated by bottles, and the vast majority of the bottle market is high volume and low margin. The cost of materials for most suppliers of packaging such as blow molded bottles is a large percentage of total production costs. Thus, when material prices spike, production rates decline.

Even a small increase in resin prices will have a large impact on the profitability of most blow molders, and prices for some resins jumped by 25 to 40% over the middle six months of last year. The prices of other materials such as paper, glass, and aluminum did not rise nearly as much, and consumer demand for many types of packaged products grew slightly.

Yet, despite the hike in materials costs, some blow molding markets posted solid gains last year, and the industry will build on those gains throughout 2003. The milk-jug market was strong, as was demand for industrial drums and gas tanks. The pharmaceutical and cosmetics sectors enjoyed solid growth, while demand for household chemical bottles was flat in 2002 after a vigorous 2001. Production for most other types of blow molded products declined, most notably polypropylene and pvc bottles.

Asian economies are flourishing

Most of the countries enjoying the fastest economic growth are in Asia. The latest data show that India’s economy is on pace to grow by 6% this year and next. India’s manufacturing activity and export demand are growing, and a stable inflationary environment has kept foreign investment levels high. The risks to India’s economy are the continuing drought that has had a negative effect on the agricultural sector, and the decline in tourism due to political tensions within the country and with Pakistan.

Despite all the saber-rattling from North Korea, South Korea’s economy continues to fare well. Total industrial production increased by almost 10% in the fourth quarter of 2002, led by extraordinary gains in the auto and semiconductor sectors. While this growth will not be sustainable, the South Korean economy nonetheless is primed to expand at a healthy clip in the coming months, as soon as issues around its northern border are resolved.

The latest data from China continue to indicate that its economy remains robust. While the data must always be read with caution, there is little evidence to suggest that its economic expansion is not vigorous as stated. Statistics out of Beijing say that the rate of expansion is currently 8 to 9%, and there is no evidence that this growth cannot continue for the remainder of this year.

Meanwhile, Japan is expected to lag again in 2003. Though first-quarter data were not available before presstime, it is likely that the economy is in a recession. The employment rate is declining, and this is pushing down both personal incomes and consumer confidence. Japan relies on strong export growth for its manufacturing base, but demand from foreign markets has been lackluster in recent months. Japan’s economy will rebound later this year as global economic growth gains momentum, but overall gdp growth will be mediocre.

Appliance demand is steady, furniture to rise

After a dip in the third quarter, the latest data from the U.S. Federal Reserve Board show that household appliance output resumed an uptrend in the fourth quarter of last year. For 2002, production advanced 5%. Low interest rates and an active real estate market will buoy demand throughout 2003. The latest forecast calls for total appliance output to increase by 6% this year.

Though the rate is decelerating, appliance makers continue to find plastics substitution applications. This is demonstrated by the fact that the growth rate of sales of resins used in appliances has been consistently higher than overall plastics growth over the past three years. In 2002, plastics use by appliance manufacturers ex-panded 7%, and the same rate of growth is expected in 2003.

Yet, despite all of the activity in the residential real-estate sector, the furniture industry has not performed as well recently. After hitting a cyclical peak in the second quarter of 2000, output of furniture and related products steadily declined in 2001 and 2002. Signs of an increase appeared in the fourth quarter of 2002, so it appears that the next cyclical uptrend has started. After declining 3% in 2002, U.S. furniture production will rise 5% in 2003.

U.S. dollar value drops sharply

After hitting a peak in the first quarter of 2002, the power of the U.S. dollar in foreign markets has steadily declined. Over the past year, the greenback’s value has dropped nearly 20% compared to a weighted average of the currencies of the U.S.’s major trading partners. The last time the dollar traded in this range was in 1999.

For many U.S. plastics manufacturers and equipment suppliers, this drop in the dollar’s value is welcome relief. Before 2002, the declining values of the euro and the yen versus the dollar meant that goods imported into the U.S. from Europe and Japan were less expensive, while U.S. goods exported into foreign markets were much more costly.

The recent decline in the dollar is attributable to a sluggish U.S. economy and three years of negative returns in U.S. stock markets. Both of these situations are expected to improve as 2003 progresses, so the current downtrend in the dollar will soon stabilize and rebound later in the year.

PE markets are in flux

In an attempt to regain margins, producers and distributors of polyethylene resins have been vigorously talking up prices. Higher feedstock and raw materials costs are cited as the main reasons for the price increases. And, while there seems to be little that processors can do in the short term other than to pay up, the good news is that most of this upward price pressure will be removed from the market as soon as the market for petroleum products stabilizes later this year.

As the rate-of-change charts indicate, the firming of resin prices in recent weeks has not been driven by demand. Sales of high-density PE have increased by 5% in the past 12 months, but at the same time, production has expanded by 7%. This has resulted in a sizeable gap between the curves. Such a gap — where supply growth exceeds demand growth — always portends lower resin prices.

As 2003 progresses, demand for most resins will steadily improve along with the North American economy. But the current prices are high enough to restrain the expansion rate to about its current level. As geopolitical tensions ease and petroleum prices subsequently decrease, there will be room in the market for resin suppliers to reduce prices to encourage demand. So in spite of the price hikes in the first quarter, our forecast calls for PE prices to decline by the end of 2003.

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