Molders Economic Index:Manufacturing: Catching the recovery, but slowlyMolders Economic Index:Manufacturing: Catching the recovery, but slowly

Agostino von Hassell ([email protected]) of the Repton Group, New York, NY, prepares this index.

Injection molders in Canada, the United States, and Mexico are enjoying solid boosts in new orders and output increases.

Profitability should also increase this first quarter by as much as 12% to 15%, based on Dept. of Commerce prior calculations of profitability of manufacturing companies.

It is a true recovery in molding. But it is a recovery with few new jobs, still limited capital spending, and certainly no major expansions.

This recovery is not across the board. Automotive molders in particular will face hard times for many months to come, unless they can gain contracts from foreign assembly plans operating in the United States.

Most molders are benefiting from the heavy investment in automation in the past years and have managed to boost productivity. The result: Output can grow for quite some time without additional workers or equipment.

The key here is capacity utilization that is slowly moving above 75%. Traditionally molders have needed 82% to 84% capacity utilization before expanding and hiring more workers.There’s good news for equipment makers as well as suppliers of ancillary products such as robots, materials handling systems, and downstream assembly and decorating units: Manufacturers are starting to replace older equipment at a rapid clip.

Manufacturing Growth

The strongest evidence of this recovery came in early January 2004. The U.S. manufacturing sector finished 2003 with its most robust month of growth in two decades.

That was the encouraging word from the reliable Institute for Supply Management. ISM reported that its manufacturing index jumped to 66.2 in December from 62.8 the previous month. The new figure was the highest since December 1983 for a sector that has shed millions of jobs over the past three years. The reading marks the sixth consecutive month of expansion.

The momentum is evident in new orders, said Norbert J. Ore, chairman of the Institute’s survey committee. A component index tracking new orders reached its highest level since 1950, rising to 77.6 in December from 73.7 in November, he said.

Yet Automotive Trouble?

Detroit is troubled, but molders who migrated and moved in on the rich business opportunities offered by German and Japanese carmakers are doing well.

U.S. carmakers Chrysler, GM, and Ford did not do all that well in 2003. All three lost market share. In 2003 GM fell short in its bid to increase U.S. market share for a third straight year as the world's largest automaker, with sales down 2.4%. Overall, Ford’s sales dropped 4.6%, while Chrysler’s sales were down by 3.5% for the year.

The three firms are hoping for a solid recovery in terms of market share later this year as a host of new models hits showrooms. GM alone plans to launch 13 new models.

Just how much business this will mean for U.S. molders is hard to tell. One thing is clear: Orders for new molds by the three Detroit firms jumped solidly.

Yet molders serving the three firms fear another massive round of incentives. They often pay for some of those and are forced to cut prices even further or surrender market share to lower-cost imported car parts.

It is worth noting that light trucks did best in Detroit, actually recording some sales increases. This is a clear benefit for molders. Pricing pressures on suppliers are somewhat less intense for these very profitable vehicles.

Toyota U.S. saw 2003 sales rise 6.3% to more than 1.8 million vehicles—the company's best performance in its 46-year history. American Honda’s sales, including the luxury Acura division, rose 8.2% in 2003 on record sales.

Construction

This remains one of the strongest markets for North America’s molders. The ultrastrong housing market has created constant new demand for plastic products such as plumbing fixtures, electrical items, appliance parts, furniture, and window hardware. This is likely to continue and for now imports are unlikely to represent a threat.

Construction spending set another record in November. The Commerce Dept. reported that construction rose 1.2% in November from the October pace to a seasonally adjusted annual rate of $934.5 billion. It marked the fifth straight month that the annual rate has set a record.

Electronics Up Again?

We are likely to see a tangible uptick in the molding of electronics components in North America. This is boosted by two developments: Demand is up and, almost equally important, the low dollar value combined with the ability of North American molders to bring new parts into production quickly have led end users like Dell to again look at North American suppliers as sources.

Global sales of semiconductors jumped in November, accelerating for the fourth straight month to $16.1 billion, a 25.7% increase compared with a year earlier, according to the Semiconductor Industry Assn. Sales were also up from a month earlier, rising 4.5%.Such demand is a leading indicator: Future demand for mobile phones, computers, notebooks, PDAs, digital cameras, and portable music players and the like will jump.

How much will North American molders receive in new orders? There will be enough to sustain an annualized growth rate of greater than 7.5% for 2004.

Why Did Orders Drop in November?Orders to American factories, after two months of solid increases, fell 1.4% in November, the biggest setback in seven months, the Commerce Dept. reported.

The November report on orders is in direct conflict with the upbeat news reported above on electronics. For instance, the Commerce Dept. in early January reported that in the communications sector, orders plunged 41.1% in November. Demand in all categories of durable goods was down 2.5%. Orders had been up 3.9% in October.

We believe that the drop for communications equipment—heavily electronics—is a temporary blip and that December and January data will show strong order increases in this sector, which had been up for the six months prior to November 2003.