Next year?s annual forecast reminds us of the Boy Scout motto, ?Be prepared??sound advice that U.S. molders will want to follow in 2006.
On one hand, many of the markets? key indicators appear healthy; the U.S. and several foreign housing markets remain robust, inflation rates remain surprisingly low, and U.S. manufacturing output and efficiency rates are good. Both the U.S. and global economies are expected to continue their upward climb, and foreign market barriers to trade are slowly dissipating.
Clouding the road ahead are several potentially disruptive factors. Topping the list of concerns is a volatile energy market that should remain highly sensitive to any market changes, a shrinking U.S. automotive industry that is struggling to remain competitive, and the ongoing flood of cheap foreign imports. Each of these issues threatens to disrupt growth for U.S. molders, and the outcome of each remains difficult to read.
Facing such uncertainties, molders may want to steer a cautious path in 2006. However, a cautious business strategy should not keep you from pursuing growth and continued capital investment. Remaining competitive in this market demands action and flexibility. A closer look at some of the key upstream and downstream markets offers clues on how molders can capitalize on new opportunities in 2006.
A classic supply shock. The falling dollar has no doubt been a blessing for U.S. molders competing with products from other markets like Europe and Japan. However, it?s a mixed blessing when purchasing imported resins. A diminished dollar means U.S. resin manufacturers pay more for imported feedstock?an expense that is passed down to their customers. As molders are forced to pay more, it becomes increasingly important to understand events affecting their key suppliers.
Katrina and Rita. The 2005 hurricanes reminded us how important the Gulf Region is to the U.S. energy and refinery sectors and how quickly Mother Nature can destroy our budgeting forecasts. These storms came when the energy and refinery markets were already struggling with costly uncertainties, including renewed security threats in Saudi Arabia, Iran?s continued nuclear ambitions, and a series of temporary refinery shutdowns in the U.S.
As a result of the hurricanes, the Energy Information Administration has again adjusted its 18-month short-term baseline forecasts. Current estimates see quarterly West Texas Intermediate prices resting at more than $63/bbl during the remainder of 2005 and 2006. This forecast is around $7/bbl higher than pre-Katrina forecasts and represents a 12% increase over average 2005 levels.
The more critical natural gas forecasts project Henry Hub prices to average $8.89/1000 ft3 in 2005 and $8.46/1000 ft3 in 2006. U.S. natural gas prices for industrial users are expected to fall from a Q4 2005 high of $12.61/1000 ft3, while annual averages for 2006 will surpass 2005 averages of $8.75 and are expected to average $9.55/1000 ft3.
Identifying Hot Markets
As the U.S. and the larger global economy continue to expand over the next 18 months, the injection molding market will grow in step with many of its important customers. A review of some of these end markets will help molders track potential opportunities.
Molders can expect a mixed blessing from this market. Industry forecasts show growing sales for 2005 and 2006, but falling prices and intense competition mean shrinking margins for PC makers, a development that will inevitably lead producers to demand lower prices from their suppliers.
A closer look at industry projections gives us a better idea of what to expect. Projections for worldwide PC shipments in 2005 have been estimated at anywhere from 199 million to 203 million units, an increase of 10-11% over 2004. Similarly, 2006 projections are expected to reach close to 220 million, jumping 7-10% over 2005 levels.
The markets of Eastern Europe, Latin America, the Middle East, and Africa are expected to see the fastest growth rates, predicted to exceed 20%. Western Europe and Asia are also expected to see impressive growth in 2005 and 2006, with increases estimated at 13-15%.
While not as impressive as these regions, the American market is expected to experience real growth in 2005, with industry analysts projecting a 9% increase in shipments. Projections beyond 2005 see growth softening to around 5-6% in 2006, but returning to double-digit growth in 2007 with the introduction of new hardware and software products, including the long-awaited updated version of Microsoft Windows.
Growth projections also vary within the industry itself, with sales of PCs that cost less than $600 easily outpacing higher-end models, a trend that means increased orders for many molders. Shipments of notebooks are expected to grow at more impressive rates than PCs, with some estimates setting sales at 58 million units in 2005 (a 24% jump over 2004) and 69 million units in 2006.
While new construction activity in the U.S. market may now be on a back-ended curve, the construction market is still expected to grow in the remainder of 2005 and into 2006, easily outpacing growth projections for the general economy. Looking at recent U.S. Census Bureau numbers for 2005, we see that for the first eight months of 2005, the total value of new construction spending grew by 9%, with the value of residential construction up 11.2% over the same period and nonresidential construction up 6.2%.
Values for public construction also rose at impressive rates, with early projections forecasting growth rates of 7% from August 2004 to August 2005, and these figures are only expected to improve now that the president has signed into law the new highway bill. The expected increase in public works will be mirrored by new residential starts, as the most recent figures for new privately owned housing units authorized but not yet started hit a record high of 235,300 in September of this year.
Industry experts predict that construction of hotels will be one of the hottest markets, forecasting growth rates of 49% for this segment. While the construction of manufacturing plants in 2005-2006 is not expected to reach the peak growth rates seen in the 1990s, the increased capacity utilization now apparent in the U.S. manufacturing sector is expected to boost new manufacturing construction by 40% during this same period.
Aside from the employee-discounts-for-everyone promotion period, Ford and General Motors continued to hemorrhage market share to Asian competitors in 2005, a trend that is expected to continue in 2006. Toyota?s sales jumped 12.3% in July, while Honda, Hyundai, and Nissan saw sales improve by 14.5%, 15%, and 19.4% respectively.
Several factors have shaped this trend. Foreign-owned automotive facilities in the United States are operating at significantly higher capacity rates than are U.S. auto producers; Toyota?s U.S. plants run at 107% of manufacturing capacity compared to GM, which runs at 75% capacity. Foreign automakers producing in the U.S. accounted for more than 25% of the vehicles produced in the Untied States though June 13, 2005.
Location also has played a part, as many Southern facilities benefit from state laws that do not require workers to join unions, even if their plant is organized. Unlike Detroit?s Big Three, new foreign production facilities are not bound by old labor contracts.
It?s estimated that U.S. auto manufacturers pay an average of $1-$2/hr more in wages for their union employees. When healthcare, cost of living, and other benefits are added on, Detroit pays its workers an average of $7/hr more than firms like Toyota.
Of course, the big concern in the minds of many automotive molders is the future of General Motors. Following Delphi?s bankruptcy announcement in October, industry experts immediately began to assess the negative implications for its old parent company GM, with some even suggesting that Delphi?s bankruptcy would eventually trigger a separate claim by GM.
While a GM bankruptcy does not now appear likely, the troubles at Delphi could cost GM several billion dollars in healthcare costs thanks to binding obligations it had made earlier with the United Auto Workers. Even more troubling would be major disruptions in GM parts supply.
Auto parts & accessories
The U.S automotive parts market is struggling with rising prices for commodities and customers demanding lower prices for their supplies. This dilemma, along with production cuts in sport utility vehicles, has exacerbated financial problems facing many U.S. parts manufacturers, often prompting Detroit to intervene financially to help keep its suppliers afloat. However, processors still have reason to be hopeful for growth within this market segment. First, electronics content in the average vehicle is expected to climb from $2250 in 2000 to $3850 by 2010. Second, rising gasoline prices have intensified the call for lighter parts, always a good omen for molders.
While the European new-car market is expected to remain flat in the near future, certain European parts suppliers should see a boost in sales as auto producers strive to add new technology into their models. Reflecting this trend, Germany?s Robert Bosch GmbH, Europe?s largest parts manufacturer, saw 2005 OEM sales jump 17.2% over 2003 to reach $16.59 billion.
Despite rising costs, increased sales were mirrored by similar increases in profits. Total revenues for Europe?s 30 top suppliers grew 17.3% in 2004 to $138.35 billion, according to Automotive News?s European ranking.
Parts suppliers in several of the top developing markets are also experiencing solid growth in 2005. India?s auto parts manufacturing industry is expected to record around 30% sales growth in 2005. India?s Automotive Component Manufacturing Assn. sees this upward trend continuing, forecasting that industry exports will reach $2.7 billion, up from its current level of $1 billion, by 2010.
Driving India?s success are its high-tech capabilities and ultralow production costs; General Motors estimates that prices for Indian auto parts are 30% less than U.S. and European prices and 15% less than prices of parts produced in South Korea or Mexico. GM has also announced that it hopes to source $1 billion annually in parts from India by 2008.
According to projections from the Assn. of Home Appliance Manufacturers, U.S. shipments of major appliances will rise in 2006, and are expected to surpass even the peak levels of 2004.
Looking at the performance of all household appliances in 2004, data compiled by Datamonitor suggest that the total U.S. market reached $28 billion in 2004, representing a volume of 130.5 million units (compared with 141.2 million units in the major European markets). Similar forecasts for 2005-2009 see an overall 1.4% increase in value and a 2.1% increase in volume, pushing the household appliance market?s annual value to $30 billion in 2009.
The Latin American market is another attractive region for household appliance sales. Brazil?s appliance market saw total revenues reach $5.2 billion in 2004, representing a 23.5% increase over 2003 and a volume of 26.8 million units. This impressive growth is expected to continue through the 2004-2009 period, with growth estimated at 8.7% annually, including double-digit growth rates for 2005 and 2006.
Molders supplying the Southern markets also will want to consider Mexico, which saw compounded annual growth rates of 7.5% from 2000-2004, with appliance volumes growing by 4.3% over the same five years. Forecasts for the 2004-2009 period predict compounded annual growth rates of 10.4%. Brazil and Mexico represent, respectively, 4.6% and 3.9% of the total global appliance market.
In Asian markets, the growing consumer power of Chinese customers will again offer greater export opportunities, as will economic growth in other developing Eastern markets. In 2004, the Asia-Pacific market accounted for a bit more than 31% of the household appliance global market, whereas the U.S. market captured just less than 25% of global sales.
The global telecommunications market is estimated to reach a value of $197.6 billion in 2005, and to more than double to $446.9 billion by 2010. Within this market, the top 10 producers are expected to maintain their dominance, managing to capture 85% of the market by 2010.
According to the Telecommunications Industry Assn., high-speed broadband access will be a principal driver of equipment revenue over the next four years. As the broadband market expands, it will necessitate the development of new infrastructure capable of supporting this traffic, propelling equipment sales upward by an estimated 8.1% annually to $325 billion by 2008.
Taking a closer look at one of the individual markets, analysts forecast an 11% increase in China?s mobile phone market in 2005. Chinese firms, which held 89% of the domestic market in 2003, are expected to see some of their equipment market share diminish as domestic consumers increasingly opt for the bells and whistles offered on imported phones. However, despite losing ground, Chinese mobile phone manufacturers expect to see their annual output grow from 213.29 million units in 2004 to 253.09 million units in 2006.
The Indian telecommunications market is another area where molders might boost sales. Mobile phone subscribers in India have grown from 14.9 million in March 2000 to 53 million in March 2005?a compounded annual growth rate of 38%. One report even estimates that there are more than 2.5 million new mobile phone users coming online in India every month.
The move from analog to digital technology is giving U.S. electronics firms an edge in the market. A recent Wall Street Journal article highlights Japan?s waning domination in the $125 billion consumer electronics market, explaining that U.S. producers are successfully using their superior programming abilities to write software for new digital chips and reducing costs by outsourcing much of the manufacturing to low-cost markets like China. Recent U.S. success stories include Microsoft?s Xbox, Apple Computer?s iPod, and Eastman Kodak Co.?s EasyShare digital camera.
U.S. sales of consumer electronics vary substantially from one product to another. For example, 2005 shipments of products like analog television/ DVD combos and digital televisions respectively saw a 44.9% and 12.4% increase over the first five months of 2005. However, similar data for camcorders and stand-alone DVD players showed a drop of 17% and 27.8%.
Much of the growth in 2006 will focus on the introduction of new and improved technology, which continues to offer more features at lower prices. Unfortunately for U.S. processors still producing exclusively in the domestic market, much of the plastic components in these new electronic goods will continue to be produced in lower-cost markets. India is a manufacturing market for molders to watch. The country?s software market has overshadowed its less developed electronics industries, but with more electronic manufacturing services (EMS) companies opening shops in India, the country?s electronic supply base is expanding.
Despite this expansion, the country?s electronics manufacturers will continue to rely on imports for 70-75% of their parts in the near future and the country?s domestic supply base will remain confined to passive and electromechanical devices. Currently, around 30% of the EMS business in India targets consumer electronic equipment, including televisions and set top boxes for domestic OEMs.
The medical device and equipment market remains a bright spot for North American and European molders. The high degree of sophistication of this market has helped shelter it from imports originating in low-cost developing markets.
The U.S. medical device market enjoys continuing record growth fueled by rising healthcare spending, which is estimated to reach $1.9 trillion in 2005. The spending trend in the medical product market shadows this rise, with projections for U.S. spending on durable medical equipment estimated to reach $21.1 billion in 2005 and $22.4 billion in 2006. Spending on nondurable medical products is projected to hit $35.3 billion in 2005 and $36.8 billion in 2006. Imports currently comprise only around 20% of the medical device market in the United States.
The Medical Device User Fee Stabilization Act of 2005, which was signed into law by President Bush over the summer, is also likely to help boost production levels for smaller medical device firms. The law states that firms with annual revenues of $100 million or less qualify as small businesses, a classification that allows them to pay a reduced amount when filing a new product application with the U.S. Food & Drug Administration. The bill also requires the FDA to limit its annual fee increase for applications by medical device firms and for timely review and approval of their products.
In August 2005, the Canadian medical device market was valued at $4.8 billion. Canadian production has reached about $3 billion annually, of which $1.1 billion is used domestically and $1.9 billion is exported (85% of these exports are sent to the United States). The remaining $3.7 billion that Canada consumes comes from imports, mostly from the United States. The importance of U.S. imports is reflected in the licensing patterns of Health Canada; U.S. suppliers account for 68% of all licenses issued by the agency, followed by Canadian firms with 9% and German companies with only 3% of total licenses.
Two other hot markets will be Japan and Europe, where affluent and rapidly aging populations are demanding more and better access to medical equipment and products. Japan?s per capita spending on healthcare in 2003 was estimated at $2139, up from $1115 in 1990.
According to the World Packaging Organisation and Pira International, the global packaging market was worth $459 billion in 2004 and is expected to grow 4.2% annually through 2009. Plastic packaging accounts for roughly 34% of the total market.
The U.S. market comprises more than 25% of the world total packaging market, and was valued at around $108 billion in 2004. The more mature North American market is only expected to experience an annual growth rate of 1.04% through 2008.
Hot markets like China and India are projected to drive some of the highest growth rates in this market. China?s packaging consumption is expected to grow annually by 8.2% to $51 billion by 2009. India?s growth is set to reach $13 billion by the same time, increasing 14.2% annually.
Central and Eastern Europe are also predicted to witness double-digit growth. Poland?s expansion is set at 11% annually through 2009, bringing that market?s value to $6 billion, while Russia will remain the region?s largest consumer, reaching $18.5 billion over the same period.
The Repton Group LLC
New York, NY; Mark Bella