Molders Economic Index: The economy expands while Detroit melts

The New Year holiday ended on a very positive note: Solid retail sales, strong orders, and continued growth in manufacturing are bound to improve business for all injection molders in 2005.

On the other hand, Detroit’s woes are a major problem for injection molders who have for so long supplied Detroit’s once Big Three: General Motors, Ford, and Chrysler.

The continued growth in manufacturing and the trouble in Detroit will further accelerate the transformation of North America’s molders from large suppliers of commodity parts to specialized firms quickly turning out customized specialty components.

Manufacturing Growth

U.S. manufacturing activity expanded for the 19th consecutive month in December 2004 and new orders were also up according to the highly reliable report of the Institute for Supply Management (ISM, Tempe, AZ). ISM reported that its main index measuring industrial activity rose to 58.6 in December from 57.8 in November, driven by new orders. The price index eased a bit in December to a reading of 72 from 74 in the previous month, while new orders increased to 67.4 in December from 61.5 in November. New export orders expanded to 60 in December from 54.7 the month before.

U.S. factories saw orders go up by 1.2% in November, the biggest advance in four months, according to the Commerce Dept. Orders for nondurable goods, meanwhile, rose by 1% in November, following a 3.1% increase in October. November’s good showing in nondurable bookings reflected increases in orders for food products, chemicals, and paper products.

The IMM index is also showing corresponding increases for November and December, and our forecast for all of 2005 remains optimistic. We also have noted a solid increase in exports of molded parts and believe this trend will continue for most of 2005.

The main concern for molders and other manufacturers remains the high cost of energy. Even though oil prices have moderated from their fall highs, transportation and energy costs for manufacturing firms continue to grab a significant portion of otherwise more profitable operations.

Will oil prices decline sharply in 2005? Most projections are for oil prices to remain in the $39 to $46/barrel range for now, the main reasons being fear of terrorism in the Middle East and the surging demand of China’s energy-hungry economy. According to U.S. government data, China alone boosted global oil consumption in 2004 by 3.1%. Only a drastic slowdown in China’s economy—unlikely for now—would reduce oil prices to the more normal $25 to $34 range. By now the arguments will have sharpened as to whether the high oil prices will slow economic growth from the sterling 4.5% in 2004. Some say the energy tab will sharply slow growth, while others—and we are among them—say that the impact on the U.S. consumer will be minimal at worst.

Nariman Behravesh, chief economist at forecasting firm Global Insight (Lexington, MA), and others project growth of just 3.5% for 2005, citing high energy costs as a key factor. We disagree. The tsunami has had minimal impact on the manufacturing economies of Asia—in particular those segments that import U.S. goods. While tourism will be down in that region for most of 2005 and part of 2006, the basic economies of India, Thailand, Indonesia, the Philippines, and Taiwan will remain strong. U.S. imports to those regions will help.

“If you look at [the disaster] from just cold numbers, it doesn’t seem to be that substantial an economic impact,” says Joseph Lau, an economist at Credit Suisse First Boston in Hong Kong. “The key thing is that the major industrial areas were unaffected, and trade will be largely unaffected by these tragic events.”

Demand in Mexico and the United States remains high and exports to Latin America have been rising sharply. The exception here is Canada, which suffers from the strength of the Canadian dollar.

Strong Housing Market

Rising interest rates are unlikely to dampen U.S. housing demand. Sales of previously owned homes in November posted their best month on record. The National Assn. of Realtors reported that sales, at a seasonally adjusted annual rate, totaled an all-time monthly high of 6.94 million units, a 2.7% increase from October’s pace.

On the other hand, the Commerce Dept. reported that sales of new homes plunged by 12% in November from the previous month. That marked the biggest drop since January 1994. However, all anecdotal evidence suggests that housing values will continue to rise along with new housing starts.

What to Think About Detroit?

The final sales data for 2004 painted a grim picture for executives in Detroit. Combined market share of the overall U.S. market for GM, Ford, and Chrysler dropped to a historical low of 58.7%. This figure has been falling for many years, but this was the sharpest drop in quite some time and during a year when overall sales for light trucks and cars rose 1% to a 17 million-unit rate. The rise of Japanese assembly plants in the U.S., as well as the still small South Korean and German assembly facilities, is forcing a rapid and wrenching realignment for injection molders who for decades relied on ever-increasing orders from Detroit. More and more molders are now adapting to the somewhat different rules imposed by major clients such as Toyota, which had a 14.8% share of the December 2004 car market, ahead of Ford (12.8%), Chrysler (9.7%), Honda, and Nissan.

This has forced relocation of molding plants, investment in new molding and secondary equipment, and a strict adherence to JIT rules. A reemergence of cars over trucks is bad news for molders—the average light truck uses about 15% more molded parts (on a poundage basis) than the average car.

Equally important is the proliferation of models. Molders have to be very nimble to adjust to a quickly changing market and must invest heavily in automation equipment to make production of short-run parts (as well as switching between parts) profitable. The good news is that the demand for diverse parts (and car models) has reduced the rate of imported car parts. Indicative of the overall strong economy, December’s seasonally adjusted annual sales rate was 18.4 million units, up from 17.4 million in December 2003.

Toyota overall saw sales jump 10% in 2004, Honda’s sales rose a more modest 3%, and Nissan reported a blistering growth rate of 23.7% for the year. In contrast, GM’s business declined 1.4% in 2004, Ford’s sales were off by 4.9%, and Chrysler’s sales declined. However, Chrysler’s volume was up a little more than 3%.

Agostino von Hassell of The Repton Group, New York, NY [email protected], www.thereptongroup.com), prepares this index. MEI is a record of production statistics that is indexed to the base period of July 1994 as 100. It also gives year-end projections. In January 2001 we began tracking, for comparison, the Federal Reserve Industrial Production Index.