With the exception of a brief flurry in the first half of 2002, growth in North American extrusion markets has been subdued for the past three years. Still, there have been some sectors, most notably building materials such as vinyl siding and window profiles, that have enjoyed periods of vigorous growth during this time. For the most part, extrusion markets in recent months have been steady. After a 4% decline in 2001, our Extrusion Business Index posted a gain of nearly 5% in 2002.
Conditions are expected to gradually improve as 2003 progresses. Growth in most building-materials segments will decelerate but remain positive, while activity in the film, pipe, sheet, and wire sectors will slowly accelerate. For the year, our Extrusion Business Index is forecast to grow 7%. There will be faster expansion in the fourth quarter and well into 2004.
Now that much of the uncertainty over the Iraq war is past, the major problem confronting extruders is materials costs. Prices for resins jumped dramatically over the past 12 months, and they remain at high levels. This increase is attributable to the spike in the cost of petroleum products that preceded the war. Much of the war premium has been removed from the oil market in recent weeks, so resin prices will soon start to drop. It remains to be seen how low they will go, but they are not likely to fall as much or as quickly as they rose in the past year.
The fastest growing extrusion markets in the coming months will be products made from plastics composites (such as wood composites). These products have undergone dramatic improvements in both their look and mechanical strength, which will make them more competitive in the marketplace. Plus, the home-improvement market will continue to be one of the fastest growing sectors of the economy in 2003.
Another market that should continue to expand at above-average rates is vinyl windows and doors. In 2002, output of vinyl windows escalated by 9%, and another gain of at least 8% is expected for 2003. Homeowners will be drawn not only to products that look good and are low-maintenance, they will be eager for energy-efficient offerings after enduring a long winter and high energy costs.
U.S. corporate profits are steadily improving
Total U.S. corporate profits, after adjusting for inventory valuation and capital consumption, increased by 7.6% in 2002, following a 7.2% decline in 2001. Profits for U.S. industries advanced by 15%. This uptrend is expected to continue in 2003, and our latest forecast calls for at least a 5% rise in corporate profits this year.
A sustained uptrend in profits is crucial to economic recovery because it drives employment and capital investment.
As the chart (opposite page) indicates, profits were strong in the first quarter of last year, but tapered in the second and third quarters. Much of this decline was due to the rise in the cost of energy products. In order to sustain profit levels, many companies pared their inventories and payrolls in the second half of 2002.
Fortunately, the conditions that were restraining profits have improved, and profitability is poised to improve. Energy prices have dropped dramatically in recent weeks. The cost of capital and inventory levels remain low, yet domestic consumption is still growing. The value of the dollar has depreciated against most of the major currencies, so American products are more attractively priced in overseas markets. Therefore, profits will rise steadily in the coming months, and employment and business spending will soon follow.
European economies await U.S. recovery
Although a few of the Eurozone's economic indicators registered signs of improvement in the first quarter, the overall trend in European business conditions in the past year has been flat. A combination of weak domestic demand, higher interest rates compared to the U.S., and an appreciating euro is preventing the Eurozone from mounting a vigorous recovery.
Most analysts agree that the euro was substantially undervalued a year ago; however, its low value compared to the U.S. dollar supported foreign demand for European products. In the past 12 months, the euro's value has risen almost 20% against the U.S. dollar. This has resulted in stiff price competition for many types of European goods and services, which has stifled growth in industrial production in recent months.
An accelerated rate of recovery will not occur until at least the second half of this year. The persistent weak conditions in Germany, Europe's largest economy, is threatening to spread into other economies in the Eurozone, and there is little evidence of a turnaround.
The European Central Bank has lowered interest rates in an attempt to stimulate flagging domestic demand. This will provide a bit of relief, but the real boost will come from an improving U.S. economy. This will spur demand for European goods and push down the value of the euro versus the U.S. dollar.
The global economy will benefit from lower energy prices that are expected, now that the Iraq conflict is less uncertain. However, there may be some residual issues between France and Germany on one side and the U.S. and Great Britain on the other regarding the Iraq situation. The ultimate effect that this will have on demand for each country's products is not expected to be large, but it could be a noticeable impediment to economic growth for these countries over the next few months.
ABS market is picking up
The published price for abs resins has been stable for the past 6 to 8 months, but the supply and demand curves indicate that prices could rise in 2003. As the rate-of-change chart shows, the recession in 2001 took a heavy toll on the market, as resin sales declined by 10% and output was slashed by 17%.
Then, the market entered into a recovery phase in 2002, and by the second half of the year, the growth in monthly sales was outpacing supply growth by a substantial margin. The totals for last year show that sales advanced by 10% while production increased by 7%. This gap in the rate-of-change chart, where the demand curve is consistently above the supply curve, is almost always followed by a rise in materials prices.
As the U.S. economic recovery gains traction, market demand for abs resins will continue to expand. This will keep upward pressure on prices. Lower feedstock costs for all polymers, stemming from moderating crude oil prices in the second half of the year, will allow resin suppliers to improve their margins without raising prices. This will put downward pressure on prices.
In the end, the steepness of the price trend for abs resins in 2003 will be determined by how quickly the U.S. economy and the market for abs expand. A moderate rate of recovery will hold abs prices steady, while more rapid expansion will push prices higher.
Bill Wood is the founder and principal of Mountaintop Economics & Research Inc., a market analysis and research firm that specializes in the plastics industry. For more forecasts and analyses of plastics markets, visit its Web site, www.plasticseconomics.com, or call (413) 624-0231.