Best recovery money can buy

Everywhere but Europe will see solid economic growth over the next 12 months. Plastics processors around the globe—again with the exception of Europe—can anticipate average growth of about 4% per year.

The above was used by the International Monetary Fund in September to describe the overall economic recovery in the United States. But is this the case for plastics processors and their suppliers? The recovery in manufacturing has become quite real for most plastics processors with solid increases in orders.

Yet manufacturing growth will not reach the growth levels seen for the overall North American economy. Most of the immediate benefits of the expanding GDP will be felt in the service sector. Manufacturing companies of all types continue to lay off workers. Capacity utilization is likely to remain in the 75% to 78% range. At the same time service businesses are hiring again.

Equally troubling for plastics processors and their suppliers is that imports continue to grab an ever larger share of key markets—automotive parts, packaging, low-level medical disposables, toys and sporting goods, and even some furniture components.

What Can You Realistically Expect?

The increase in new orders to plastics processors virtually will double from 2.1% in Q2 2003 to 4.1% in Q4. For 2004 we project an overall increase of 4.5%, continuing the trend.

Extrusion markets are set to perform better than any of the other plastics manufacturing processes. Why? Two boom sectors of the overall economy fuel demand for extruded products. The improved retail market translates into sharply higher demand for packaging products such as film and sheet. The still red-hot housing market boosts output for simple products such as pipe, wire and cable, and sophisticated extruded items such as window frames.

Note here that home construction jumped in July to the highest level in more than 17 years. The Commerce Department said housing construction totaled 1.87 million units at a seasonally adjusted annual rate last month, an increase of 1.5% over the June level of 1.85 million units.

This growth pattern is reflected in machinery sales. Year-to-date—counting imports and domestic machines—overall processing machinery sales are up about 4.9% compared to 2002. However, the sale of extruders and auxiliary equipment shows increases on a year-to-date basis of 7.3%.

While extruders get most of the benefit from the housing market, other plastics processors have benefited from the strong housing market.

The Import Dilemma

Plastics processors face growing challenges from imports. Until 2000 most imports—regardless of processes used—where for relatively low-grade commodity items (with the singular exception of electronics components). Today, major importers into the United States are starting to grab market shares in products long considered "safe" from import competition.

For instance, import of complete automotive subassemblies—such as rear-view mirrors and even complete seats—from China alone have tripled since 2000, and the rate of increase is likely to accelerate as plastics processors in China acquire more know-how and expertise.

Equally troubling for North American plastics processors is that Mexico—long considered to be a safe haven offering high-quality processing combined with low labor costs—is likewise losing business to China and other parts of Asia.

The question of imports from China will be one dominant theme in the next year as unions and manufacturers continue to demand political solutions to the wave of imports. Key here is the demand for China to adjust its currency now or face special import tariffs of as much as 26% of all goods sold into the United States.

How realistic is it to expect action on the China issue? On one hand, U.S. consumers would have to forgo access to low-cost Chinese products, and that carries a political risk. In addition, many U.S. firms that have moved manufacturing to China would protest against any efforts to curtail this money-making opportunity, putting them at odds with counterparts lacking a China presence.

The lack of a unified front from manufacturers on the China issue, as well as considerable uncertainty by the politicians, suggests that while the issue will be debated, little action is likely in the next year and beyond. Still, data from the U.S. Census Bureau show just how serious the problem is: Chinese exports to the United States doubled to $125 billion in 2002 from $62 billion in 1997.

Conversely, U.S. exports declined from 2000 to 2001 (more recent, but partial, data show that this trend has accelerated): Resin and chemical exports declined 4%, or $718 million; plastic articles exports are down $537 million, a loss of 7%.

Other U.S. Government data show that in the last 18 months manufactured goods exports plunged a considerable $140 billion or 20%. The drop in manufactured goods exports is so large that it accounts for two-fifths of the entire decline in U.S. industrial production and manufacturing jobs.

Projecting Growth

The International Monetary Fund (IMF) in September projected that the overall global economy appears poised for growth.

The IMF predicted 3.2% growth this year and 4.1% for 2004. Key pillars supporting these projections are relatively mild energy prices: IMF projects an average of $25/barrel for oil in 2004.

But not all areas will show growth. For instance, the IMF predicts that the 12 Euro countries may only have .5% growth this year and 1.9% next year. Limited growth is also projected for Latin America.

Asia, on the other hand will show the strongest growth: The Chinese economy is expected to grow 7.5% in 2004; the rest of Asia will grow at about 6.5%. The Russian economy is expected to grow at 6% this year and 5% in 2004. Growth in the Middle East, primarily driven by oil production, is expected to be 5.1% this year and 4.6% next.

"GDP growth in African countries has remained surprisingly resilient," the IMF said, with expected growth rates of 3.7% this year and 4.8% in 2004.

Of equal importance to these growth projections are long-term forecasts on currency values, including China''s yuan. Most economists see minor currency fluctuations, which will allow plastics processors as well as their suppliers to plan with a relatively stable financial model and outlook.

What could derail this rosy growth output? Another major SARS outbreak is the most likely source of trouble. Equally problematic—yet hard to project—are potentially major political and military engagements involving North Korea and Iran.

What Does This Mean?

The next 12 months will produce some major benefits of this recovery for plastics processors and their suppliers. Here are our predictions:

Equipment sales

Global equipment sales will jump 7.8% overall. Extruder shipments in particular will see the most dramatic improvement, racking up sales increases well in excess of 11%. Blowmolding and injection molding machine sales will grow about 6%. But the most growth will be in highly automated auxiliary equipment—everything from robots for injection equipment to assembly units for decorating machines. We anticipate sales to explode at an annual rate of 12%.

Auxiliary equipment

The primary cause of auxiliary equipment growth is anticipated pressure on Asian economies to maintain some kind of competitive advantage over China. This means labor-saving devices will be in increasing demand.

Resin demand

Resin suppliers will register solid growth. But the growing demand for local sources of resin—located near processing plants—is expected to force resin markers to boost investment in new plants, primarily in Asia.

Global trade

Much of the growth in output of processed plastics will be for global trade. That means sharp growth for packaging manufacturers, particularly blow film makers and processors of urethane foam and similar packaging.

Disposable medical devices

Healthcare spending is growing on a global basis and at rates overall 2 percentage points higher than overall GDP growth rates. Disposable medical devices are a strong growth market.

Electronics

Electronics will show respectable growth, but lacking a new "killer" application, a return to 13% to 18% annual growth rates is unlikely.

Editor''s note: Economy & Markets is a new section of Modern Plastics that will appear monthly, covering emerging economic trends and reporting critical financial data. The author is Agostino von Hassell, of the Repton Group LLC (New York, NY). Contact von Hassell at [email protected]

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