Sponsored By

February 1, 2005

8 Min Read
The currency edge

Regardless where you call home, if you''re in the plastics processing business, you''re probably feeling the effects of the falling greenback. However, depending on where you''re producing, the impact of this phenomenon is likely to be very different. Understanding the benefits and drawbacks of a falling currency is an important tool for processors struggling to compete in a global market.

From early 2002 through the end of 2004, the U.S. dollar lost 37% of its value compared to the euro, and around 24% of its worth when measured against the Japanese yen; the dollar''s depreciation relative to the yen has been mitigated by what has appeared to be a greater willingness on the part of the Japanese government to intervene in the currency market to slow the yen''s rise.

America''s economic guru, Federal Reserve Chairman Alan Greenspan, recently reminded us that we generally have about as much chance of predicting a coin toss as we do at forecasting the movement of currency markets; however, despite the uncertainties associated with international currency, there appears to be consensus that the dollar will continue to fall in 2005, and that it is likely to bottom out at around $1.40 to the euro. Movement below this level is expected to force intervention by the European Central Bank.

What this means for processors

For U.S. processors, the diminishing power of the dollar has and will continue to give their goods greater price competitiveness in both the domestic and international markets, a welcome side effect for an industry that has routinely complained about the overvaluation of the dollar. On the flip side, American processors must also be prepared to take the good with the bad; the same factors that are deflating the dollar are also likely to stem the current high levels of foreign investment, which have become necessary to cover the growing federal deficits and keep the economy growing.

At the moment, the U.S. still takes in more foreign income than it pays out on its debt; however, if foreign investment shrinks, as it appears to already be doing, we can expect interest rates to climb. To date, low interest rates have helped to limit the costs of our growing deficit. However, leading experts like Goldman Sachs have speculated that as foreign investment income dries up in 2005, and as interest rates rise, the U.S. economy will experience a net deficit by the end of the year.

Processors can also expect that as the dollar becomes more affordable-and with it, U.S. goods-demand for U.S. plastics will rise in the domestic market, as well as Europe and Canada, where the currency is not bound to the dollar. This increased demand will take place within a global plastics market that is already experiencing tight supplies due to high demand in Asia and limited capital investment during the recent recession. This scenario will apply greater pressure to supplies and should push prices up around the globe.

What the falling dollar means for processors abroad varies depending on the market. Processors in many Asian economies like China and Malaysia, which pin the value of their own currencies to the dollar, will not experience any diminished price competitiveness with U.S. goods and can expect to see the competitiveness of their own exports also rise with the falling dollar.

Processors in Europe, Japan, Latin America, and elsewhere will have a more difficult time competing on price with comparable U.S. goods.

A stable and strengthening euro, however, should engender greater foreign investment as international investors look to shield investments from a diminishing return associated with a falling U.S. dollar. Not much has been said about this aspect of the falling dollar in the popular media, but if the euro begins to replace the greenback as the currency of choice for investors, the U.S. economy would suffer a terrible loss of foreign capital investment; currently the majority of U.S. dollars are held outside of the U.S.

The warning signs are already with us: recent moves by OPEC to transfer larger and larger portions of their assets into euros, as well as talk since 2002 of possibly pricing and even invoicing in euros. Major change is not likely to happen anytime soon, if at all, but as the EU expands to include Eastern European economies, it will capture an even greater percentage of OPEC''s exports (the EU already is OPEC''s largest trading partner) and, as a result, demand greater consideration from the ruling body.

Finally, the rising value of foreign currencies like the euro and yen should also help processors who import increasingly expensive commodities like resin and energy, as the greater value of their currencies will provide them with greater purchasing power; but here again, the negative impact of an already high production cost will limit the manufacturers'' ability to pass on these increases.

Global updates

Taxes, vetos, and auctions in the U.S. market

On the West Coast, a battle continues to be waged over a proposed bag tax in San Francisco, CA. The disputed legislation would impose a $.017 tax on every grocery bag sold in the city in an effort to curb litter and reduce city cleanup and recycling costs.

The domestic plastics industry and the grocers association oppose the tax, arguing that it will unfairly burden lower-income consumers, and question whether the city''s environmental goals could be better served by lending greater support to collection and recycling efforts. If this legislation passes, processors can expect similar initiatives in other U.S. cities. Precedent for this type of bag-tax initiative can be found in Australia and Ireland.

The East Coast also made news recently, when New York Governor George Pataki vetoed legislation that would have renewed a three-year ban on the use of plastic plumbing pipes in commercial and larger residential construction. The decision reopens a huge market for PVC manufacturers; according to a report by The Buffalo News, old requirements demanding cast iron or copper added around 6% to the total construction cost for an apartment complex, and drove up labor costs for plumbing by 25%.For processors still looking to trim equipment costs, the end of 2004 witnessed the creation of www.stopolauctions.com, the first-ever interactive, online auction site dedicated exclusively to the plastics industry. The site allows members to safely buy and sell new or used plastics machinery as well as other business capital. Membership is free, but Stopol Inc. will charge a nominal fee on all completed sales made through the site. Happy bidding.The PhilippinesDespite intense pressure from a federation of seven plastics industry associations in Southeast Asia, as well as domestic Philippine downstream plastics industries, the Philippine government has again decided to extend special tariff protection to its petrochemical sector for another six months. This move has particularly upset the Philippine domestic downstream plastics industries, which have been forced to pay more for plastics resins, and, as a result, are having an increasingly difficult time competing with cheaper finished plastics imports. Under the terms of the ASEAN (Assn. of Southeast Asian Nations) Free Trade Agreement, ASEAN governments were required to implement a tariff reduction program, which set import tariffs at between 0% and 5% for plastics resins and selected plastics finished goods by Jan. 1, 2003; the Philippine government had already granted its petrochemical industry a two-year reprieve that was to end on Jan. 1, 2005. The Assn. of Petrochemical Manufacturers of the Philippines (APMP) is strongly lobbying for a further six-year extension of Executive Order 161, which sets import tariffs at 7% to 10% on petrochemical resins and certain plastics products. However, with the end of Malaysia''s tariff protections for its auto industry, any prolonged extension of Filipino petrochemicals protections will be sure to solicit the intense pressure of the remaining ASEAN members.The rewards of going greenThailand''s National Innovation Agency (NIA) has initiated talks with Germany''s BASF concerning a $110-million joint venture to produce biodegradable polymers or polyhydroxyalcanoates (PHA) based on agricultural crops like sugarcane and cassava. The facility would be built in Thailand and is expected to receive friendly tax status by the Thai government. Biodegradable plastics have become more price competitive in recent years, and new environmental legislation, like the European Union''s directives on Waste Electrical and Electronic Equipment (WEEE) and the Restriction on the Use of Hazardous Substances (RoUHS), which went into effect Jan. 1, 2005, make biodegradable plastics an even more attractive opportunity. The biodegradable market is also expected to continue expanding in the U.S., where it is predicted to grow by more than 16% annually, surpassing 290 million lb by 2008. Expanding opportunities in MalaysiaIn a paper presented to the ASEAN Federation of Plastics Industries (AFPI), the Malaysian Plastics Manufacturers Assn. (MPMA) reported that Malaysian exports of plastics packaging materials and plastics household wares rose by 28% and 16% respectively during the first three quarters of 2004. The same report projected that year-end PVC pipe production is expected to have jumped almost 22% in 2004.The cost of success in IndonesiaIndonesia''s Olefin and Plastics Industry Assn. (INAplas) has claimed that the Indonesian plastics industry will need another US$16 billion of investment over the next 10 years to sufficiently develop its upstream plastics market, an estimate based on an expected 150% rise in consumption of plastics goods over the same period. At present, Indonesia has one of the lowest rates of per capita plastics consumption in Southeast Asia, but INAplas sees consumption jumping to 25 kg per capita by 2015.Agostino von Hassell [email protected], and Mark Bella [email protected], of the Repton Group LLC (New York).

Sign up for the PlasticsToday NewsFeed newsletter.

You May Also Like