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North American plastics: Fall strength continues

For North American plastics processors and the suppliers to this strong market, this fall shapes up as another season of growth that very well may extend into 2007.

Admittedly, there are some problems: Consumer spending may take a hit from gas prices; energy to operate any type of plastics processing or resin production plant will see price escalations; and the evermore dramatic shift in automotive parts production will impact plastics processors mostly in Indiana, Ohio, and Michigan in a negative way.

But these negatives are easily outweighed by the positives: Exports of both manufactured goods and raw materials (such as resins and additives) are increasing, and the low value of the dollar coupled with resurgent economies in Germany, Eastern Europe, Japan, and a still-strong China will help fill order books.

Orders in major plastics processing segments-packaging, urethane and similar foams, blowmolding (medical, automotive, and specialty packaging will be particularly strong), wire and cable coating, and injection molding for medical, electrical, electronics, and housing are strong sectors.

July Strength

July brought another strong manufacturing performance. The overall index of the Institute for Supply Management (ISM; Tempe, AZ) jumped to 54.7, up from 53.8 in June. Any figure above 50 shows expansion in manufacturing.

The National Assn. of Purchasing Management-Chicago''s new orders index for July rose to 60, from 57.2, which had been the lowest since February, the group said recently. Its production gauge rose to 64.1 from 54.6.

Many had instead expected a reduction in manufacturing output, due to the fact that the second-quarter GDO data came in at a very low 2.5%, well below the ultrastrong first quarter.

Now most anticipate a GDO growth of 3.1% in the third quarter and a touch more in the fourth quarter. Part of this optimism stems from growth in manufactured goods exports as well as the surprising resilience of consumer spending in the face of rising energy costs. Note that durable goods orders jumped 3.1%.

The typical buildup of inventories in early fall will further boost September and October orders for manufacturers.

The early August reports on the massive shutdown of the BP oil filed in Alaska, coupled with political worries about Iran and Iraq, along with the fear of hurricanes, will altogether have boosted gas prices by $0.05-0.08/gal by the time you read this. Prices for crucial feedstocks for resin production, as well as the energy needed to run plastics processing machinery and resin manufacturing plants, will also rise.

But the actual impact may turn out to be modest. The U.S. consumer has shrugged off similar increases in the past and consumer spending has continued. In June, consumer spending was up a very strong 0.4%.

What''s more, ISM data and similar reports show that manufacturers are having an easier time passing off cost increases caused variously or cumulatively by labor, energy, or raw materials.

Inflation Worries

Price increases translate into inflation worries. Right now inflation stands at an annual rate of 2.4%, just high enough to force the Federal Reserve to continue boosting interest rates until a pause was announced at its latest meeting in August.

But to date, even the higher interest rates have done very little to curtail consumer spending or capital investment by manufacturers.

Trends to watch

September and October will be crucial for plastics. And this is also the time of year when many companies-be they resin suppliers or processors-plan capital spending for 2007.

Early predictions are-from what we hear from processors across North America-that capital spending may grow as much as 8%-10% across plastics. This is very much a survival step.

To compete against Chinese imports as well as handle energy costs that are bound to remain high and go higher, plastics resin makers and processors see the need to invest in more energy-efficient and highly automated equipment. In injection molding, all-electric machines have grabbed an evermore significant market share in the first six months of 2006 and sales for that type of equipment are 28% greater than the corresponding period in 2005.

What else should be monitored?

Will the strong growth in exports continue? In May export grew about 2.4% to the highest level ever, while imports of consumer goods dropped by $40 billion.

U.S. carmakers (GM, Ford, and Chrysler) retained just 52% of the domestic market in July. If this trend continues, it will impose very harsh consequences on traditional processors serving those manufacturers. Yet at the same time, the output of all plastics parts for automotive in the U.S. is increasing as Asian and German transplants buy more and more components locally. For all of 2006, car sales are seen to exceed 17 million units, above the level seen in 2005.

Will housing truly decline? Stories that this one pillar of the manufacturing economy is about to decline have dominated the news for many months. But in June construction spending grew 0.3%. Housing starts are holding on to strong levels (albeit they are not growing much), and any orders for plastics goods from this market are unlikely to decline at all for another six to eight months.

A housing slowdown will be regional at worst: Some sections of the country such as the Midwest and parts of the Northeast may see declines, but others will grow. Any regional decline tends to be bad news for producers of items such as extruded pipes: Much of this business is regional because transportation costs are a critical element.

Critical for export growth are four countries: Germany, Japan, China, and India. And here is what should be of key interest now in September.

In Germany: Business confidence and employment is up and the nation has been able to boost exports while, at the same time, buying more product from the United States. We hope this will continue. Japan''s economic resurgence-growth projections for 2006 were raised to 2.1% (a very high level for Japan)-will attract more imports from the U.S. And India, weighing in with a very solid growth of 8%/year, has been working on reducing trade barriers, which will allow for more U.S. imports.

The wild card is China. The country''s financial system is in a crisis but nobody wants to fully admit this. In addition, recent efforts by the Chinese to pretend that they will raise the value of the heavily undervalued yuan are increasingly seen as what they are: a sham. China''s ability to crack down on intellectual property right violations and somehow restore some kind of solid human rights record is also starting to concern companies that still want to invest there. The next year will be critical for China.

Agostino von Hassell ([email protected]), and Lisa Pellegrino ([email protected]), of the Repton Group LLC (New York).

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