According to our proprietary Injection Molding Business Index, North American injection molding output grew in every quarter in 2002, but decelerated in the second half. The index grew a healthy 6% in 2002, but over the latter six months, average monthly growth was 3%. The current outlook is a gradual but steady acceleration in output throughout 2003, and another 6% annual expansion is forecast.
The same activity pattern was evident in the Federal Reserve Board’s seasonally-adjusted index for total U.S. plastics production. At 106.9 (1997=100), the January index was steady versus the previous month, and was 3% higher year-on-year. For 2002, plastics output grew just 1%.
The industry has not built momentum in the past two quarters, but growth has not diminished, either. This consistency is actually good news in a time of rapidly rising resin prices. Once resin prices descend, demand and profitability will improve marked-ly for most processors.
By now, the marketplace has adopted the belief that uncertainty over a possible war between the U.S. and Iraq is the reason for the lack of acceleration in industrial production. It is also the reason given for the recent spike in resin prices. At press time, we believe that any actual conflict will be shortlived, and the industry will see lower resin prices and a surge in activity. Our forecast is a 6% rise in plastics production in 2003.
Housing starts, the economy’s best leading indicator, registered a healthy 8% year-on-year gain in January. Housing starts jumped by more than 6% in 2002, with a 10% jump in the fourth quarter. It appears growth in residential construction will continue for the foreseeable future. Our forecast is a 5% gain in housing starts in 2003.
Recent retail sales data suggest that economic recovery will continue. Retail sales (excluding automobiles) increased 5% in January. For 2002, retail sales grew 4% over 2001, and our 2003 forecast is for 5% growth.
Many major injection molding end-markets had a good 2002, and most will carry their momentum through 2003. These include electronics and appliances, building materials, healthcare products, sporting goods, and general merchandise.
U.S. business spending, long dormant, is exhibiting signs of an upswing. The latest gdp data show a small increase in investment in the fourth quarter, the first in two years. This should mark the beginning of a sustained uptrend that will become more broad as 2003 progresses.
So, barring a major disaster, the U.S. economy will not fall back into recession (double-dip). On the contrary, the gdp will build momentum throughout the year. As usual, the processing industry will be a few months ahead of the trend in overall manufacturing. Managers should now plan for the pending acceleration in demand.
Improving business conditions will be especially good news for machinery suppliers and moldmakers. Historically, the market for molds and molding machinery is sparked by sustained growth of at least 4 to 5% in molding production. Growth exceeded this level in the first half of 2002, but rising resin prices and a sluggish economy then halted the market.
Latin American data offer hope
While the economic situation in Latin America remains tenuous, the latest gdp data indicate that the worst may be over. Argentina’s economy is still in distress, but its industrial production and gdp data have reversed their precipitous decline from the beginning of last year and mounted a modest recovery in recent months. Argentina is still in desperate need of investments, and this will not occur until economic reforms are established. A new president was elected in March, but it will take some time before the international community is ready to take risks on Argentina.
Though its growth has been mediocre, Brazil’s economic situation is not quite as desperate. The dramatic depreciation of the real has substantially aided export growth. Unfortunately, there has been a sharp rise in inflation and a decline in domestic consumption, too. Brazil’s central bank has aggressively raised interest rates to stem inflation, and further hikes appear necessary. This will further dampen production and employment growth.
Mexico’s economy is closely tied to the U.S. economy, and growth is currently subpar. The Mexican government had set a target of 1.7% growth in 2002, but saw only 0.9% expansion. Manufacturing actually declined slightly last year. The peso’s value has depreciated recently, increasing export demand but also pushing up inflation with higher prices for imports. Like the U.S. economy, most analysts believe that a war with Iraq will be the biggest factor on the Mexican economy this year. Mexico’s central bank forecasts 3% economic growth this year if war is short or averted.
Consumer spending will grow gradually
After adjusting for inflation, U.S. consumer spending increased 3.1% in 2002. Durable-goods expenditures registered the strongest growth, expanding by 7.3%. Expenditures for non-durable goods were up 3.2%, and spending on services advanced 2.2%.
The durable-goods sector is comprised of products that last at least three years, and includes autos, appliances, electronics, and furniture. These are all large plastics end-markets, especially for injection molding. After a solid 2002, appliance, furniture, and electronics demand will post 3 to 4% gains in 2003. Growth in autos will decelerate this year, although it will remain respectable.
Growth in non-durable goods spending will accelerate up to 5% in 2003. Most of the gain will be due to higher costs for energy products, but clothing, food, and beverages will also post increases. Non-durable goods are the largest users of plastics packaging, so spending growth bodes well for manufacturers of bottles, film, sheet, caps, and closures. Polystyrene prices are up sharply
In the past 12 months, the published price of injection molding polystyrene has jumped 30%. The last price peak for ps resins was in the third quarter of 2000, just as the plastics industry as well as the U.S. economy went into recession. ps prices then went on an 18-month decline. Our latest forecast is that prices will stabilize and then drop later this year.
This is based on the latest pattern in the rate-of-change charts for ps supply and demand. As the chart shows, production rates increased steadily in 2002, and by mid-year output was accelerating faster than sales. But feedstock costs then began to rise rapidly in response to the substantial increase in the cost of petroleum products. So, even though ps prices were relatively high, suppliers were losing margins.
By the end of 2002, growth in ps production had dropped dramatically, and the gap between the supply and demand curves narrowed. While this will keep a floor under ps prices in the short term, it is not sustainable. Two likely scenarios are that processors will curb ps purchases because of high prices, and that ps prices will decline as geopolitical tensions ease and the price of petroleum products drops accordingly. Though either development would result in a pricing downtrend, the latter is more probable. A post-war resin market will have moderating prices and steady growth in both supply and demand.
