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April 1, 2005

8 Min Read
Budgeting for the unknown

If the many challenges of our increasingly global and competitive market were not enough to keep processors up at night, now manufacturers must also attempt to somehow adequately budget for soaring and increasingly volatile energy prices, a task that is making it all the more difficult to set their own long-term prices.

Although it''s impossible to foretell the future with any real certainty, current trends and new developments do allow us to offer a general sense of where the market appears to be headed over the next several years.

Evaluating the market

Because oil and natural gas are key feedstocks in resin production, their soaring costs were generally passed along to processors throughout 2004; processors therefore were in effect taxed twice when energy prices rose. This unique sensitivity makes it particularly important to understand how rising global consumption patterns might affect future prices for energy and resin commodities.

Recent and increasingly disturbing news out of China suggests that the country is finding it more difficult to support its growing energy needs. China is the world''s largest consumer of coal, which currently supplies roughly two-thirds of the country''s energy requirements and fuels most of the country''s strapped power industries.

Early estimates by the China Coal Industry Assn. suggest that coal consumption will jump another 6% in 2005, rising by 120 million tons to 2.1 billion tons for the year. The problem is that many of the country''s industry analysts feel that existing mines, which are already running at or near capacity, cannot handle this increase, nor will the development of new mines be sufficient to pick up the slack.

Aside from the real political and economic risks that could develop within China if industries face prolonged and severe energy shortages, a lack of coal will force the country''s new power plants to switch to different fuel sources, primarily natural gas and oil. This conversion will undoubtedly place increased pressure on gas and oil prices in the short and long terms.

Looking beyond the impact of China, greater output from oil and gas producers will help reduce prices for energy commodities and, in turn, for their downstream products. However, in the short run, 2005 does not appear to offer processors much reason to be excited.

While it''s true that OPEC increased output quotas four times in 2004, and that production levels largely surpassed quotas (reaching levels not seen since 1979), to date demand has kept pace with supply. The increases eroded the surplus capacity of many key producers, creating a situation that now demands new capacity investments.

Officials at the International Energy Agency (IEA) agree. In its World Energy Outlook, the IEA predicts demand will rise from 77 million bbl/day today to 90 million bbl/day by 2010. IEA officials also see the need to develop new Middle East fields, asserting that current investments have not been ambitious enough to meet expected demand growth and warning that it will still be some time before the most recent investments fully ease current market pressures.

In the final analysis

On the supply, processors can expect that increasing global demand will continue to stay close to the growing output. Processors should also be prepared for continued volatility that attracts financial speculators (i.e., hedge funds) and is easily spooked by ongoing strife in the Middle East.

Sadly, for producers dependent on natural gas, it will still be a few years until new LNG investments significantly tame the natural gas market. American processors holding their breath for legislative intervention to ease gas costs should not expect any real action until at least the next major U.S. election year (2006), and even then the most promising proposals will primarily address long-term solutions.

A look at markets

India: In a dual effort to address urban waste problems and to develop the country''s plastics industries, the Delhi government is considering approving a joint venture with the Bangalore-based KK Plastics to develop plastic roads in the Delhi area. Mixing scrap plastic with thermoplast powder and bitumen is said to create a longer-wearing, more compact road surface by increasing bitumen bonding, and raising resistance to water. Proponents claim road life can be extended by a factor of three.

The Delhi State Industrial Development Corp. and its team of engineers has already cleared two 1-km stretches within Delhi for pilot road projects, which should begin development following final approval of a 530-km stretch of plastic road in Bangalore.

Plastic roads are just one of the forces fueling India''s plastics consumption and production. Despite relatively low levels of current plastics consumption, by 2010 India is projected to consume 12.5 million tons of polymers annually, making it the world''s third-largest polymer consumer.

Nikhil Meswani, executive director of Reliance Industries Ltd., India''s largest petrochemical firm, which is expected to export nearly US$5 billion worth of plastic feedstock chemicals in 2004-2005, forecasts double-digit growth for petrochemicals in 2005. To keep pace with this growth, Meswani says that through 2012, India''s petrochemical industries will need to secure roughly US$14 billion worth of processing machinery investment.

Vietnam: In February, Ngo Van Thoan of the country''s Ministry of Trade (MoT), Trade Promotion Dept., made it clear that the country''s plastics industries would again be a key part of it trade promotion efforts in 2005.

This commitment by the government has helped increase industry expectations for growth in 2005. The Viet Nam Plastics Assn., for example, forecasts export revenue to reach US$324 million in 2005, a 20% jump over 2004 earnings. Much of this growth is expected to come from exports to the U.S., which became the county''s second-largest plastics market in 2004, recording export growth of 134% in 2004.

United Arab Emirates: Dubai has twice made the news recently, first as the host of ArabPlast 2005, and second when the Dubai-based Jebel Ali Free Zone Authority (Jafza) launched its new project, called the South Zone. The project will focus on the development of eight clusters of industrial businesses.

Clusters will include the chemical and plastics field and several important downstream industries like pharmaceutical and medical products, as well as clusters devoted to food, beverage, fragrance, and beauty products.

Plastics manufacturers that establish operations in the South Zone will not only receive the full benefits of Dubai''s free trade zone and liberalized licensing policies, but will have access to amenities like hazardous and nonhazardous waste disposal and special water treatment facilities.

Iran: As Western governments intensify pressure on Iran to curb its alleged nuclear weapons programs, the cost of the country''s ostracism with the West has begun to take an economic toll.

The latest evidence of this process was the announcement by General Electric that it would sever its business ties with Iran. This move follows similar pullouts by Halliburton and ConocoPhillips, as well as concerns expressed publicly by international businesses like Thyssen-Krupp AG, and England''s'' BP PLC.

Although the economic impact of these departures is minimal, if Iran is unable to satisfy the nuclear concerns held by the U.S. and many European nations, greater economic isolation is likely. It will also undoubtedly have a negative affect on Iran''s petition for WTO membership.

United States: The U.S. market made the news in February following the Dept. of Labor''s release of data showing virtually zero inflation, a particularly cheerful development considering the impressive economic growth rates achieved in 2004 and early 2005.

However, despite low inflation rates, the Fed is expected to continue its interest rate hikes. The hikes apparently are not significantly damping the current period of GDP growth, measured at 4.4% for 2004 and expected to remain somewhere between 3.8% and 4% in 2005.

While rate hikes will inevitably slow borrowing and cool the blazing real estate market, that pressure will be mitigated by other positive factors associated with a growing economy, like rising employment numbers and growing income levels. It should also be remembered that the U.S. housing market still benefits from historically low long-term mortgage rates.

To put things into perspective, while industry experts like David Berson, VP and chief economist for Fannie Mae, forecast new-home sales will fall 9% in 2005 and sales of existing homes will slow by roughly 8%, home sales in 2005 are nevertheless expected to be the third-strongest on record.

This news is especially welcome to the plastics building products market, which has in recent years made significant headway, recording strong double-digit growth-higher than traditional building products. Processors can expect increased industry consolidation and manufacturing expansion within this sector to push growth rates even higher in 2005.

Europe: The Council of Ministers voted in February to grant an extension for the newly admitted EU members, giving them variously to the end of 2012 through 2015 to bring packaging waste-recovery and recycling systems into compliance with EU standards. Current EU requirements demand a minimum of 22.5% of plastic packaging (by weight) be recovered, counting exclusively material that is recycled back into plastics.

The 2004 sales figures published by the European automakers association make it clear that Asian manufacturers made significant headway in Europe. A January 2005 report in Automotive News reported that favorable exchange rates helped Korean and Japanese automakers capture a large portion of the 1.8% in increased sales.

The big winners in 2004 included Kia, which grew 44.4% to 154,803 units; Hyundai, which experienced a 21.8% improvement over 2003; and Mazda, which saw an impressive 18.7% jump. Toyota and Lexus each grew 7.1%.

Among European and North American automakers, BMW Group experienced the most significant improvement, rising 12.2%, while Ford''s European group ended the year up 4%. GM Europe was up only .6%. Mercedes-Benz saw sales shrink by 3.9%, while Daimler Chrysler lost 1% from 2003 figures.

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

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