Our Pipe Business Index for North America declined 5% in 2007, ending a streak of five consecutive years of growth. During this five-year period the average annual growth for plastic pipe output was 4%. For 2008, the decline in pipe demand is expected to level off, but there is no expectation of a return to growth until 2009 at the earliest. We forecast a decrease of 3% in North American pipe output this year followed by a 3% gain next year.
The data that make up the Pipe Business Index are dominated by the PVC and HDPE pipe segments. After holding steady in 2006, North American PVC pipe output declined by about 5% in 2007. No growth is forecast for 2008, but market forces for PVC pipe will turn more favorable in 2009. This is a mature sector, which means its cyclical pattern is less volatile and demand is significantly affected by the price of this product vs. other substitutes. High crude oil and natural gas prices have pushed the price of PVC resins to cyclical highs. But the good news is that copper prices have spiked by a whopping 67% in the past two years, and this has enhanced the competitiveness of PVC pipe in some market sectors.
Output of HDPE pipe declined by about 7% in 2007. This was the result of a 4% decrease in production of non-corrugated pipe and a 12% drop in output of corrugated. Both of these trends should find a bottom by the second half of this year, but they will see an overall decline of 3% in 2008. Demand for non-corrugated pipe is expected to bounce back more quickly.
Markets for HDPE pipe are less mature than those for PVC pipe, and output of HDPE pipe hit an all-time high in 2006 before backing off in 2007. A less mature market means that demand for these products is affected not only by price, but also by new applications and penetration into markets for pipe made steel and concrete. Here again, the high price of resins is hurting HDPE pipe, but both steel and concrete prices are also up 17% to 18% since 2005.
The relatively modest fluctuations in the overall annual demand for pipe products in 2007 were the result of unusually large annual changes in the forces that affect the market for plastics pipe. The most notorious of these is the recent plunge in new residential construction. The number of new housing starts plummeted 25% in 2007 following a drop of 13% in 2006.
The forecast calls for another decline of 10% in new housing starts in 2008. The bright spot is that the trend appears to be at or near the cyclical bottom. This means that it will still take a few months of consolidation before the market shows positive growth, but the decline will now start to decelerate.
Data on residential construction expenditures, which includes spending for alterations and repairs on existing structures as well as spending on new houses, is not much better. Residential construction spending declined almost 18% in 2007 and is down at least that much so far in 2008. Activity in the residential alteration-and-repair sector are less volatile than housing starts, but our outlook still calls for no growth in 2008.
Meanwhile, spending for non-residential construction is showing strong gains. In 2007, non-residential spending jumped more than 15%. The strongest gains were in buildings for lodging, offices, commercial, and education. Large gains were also registered in power and communications projects as well as highways and streets.
Bill Wood, an independent economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield, Mass. He can be contacted by e-mail at BillWood@PlasticsEconomics.com. His monthly Injection Molding and Extrusion Business Indexes are available at www.ptonline.com.