Business conditions for the North American plastics industry will continue to improve steadily in 2005.

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Business conditions for the North American plastics industry will continue to improve steadily in 2005. This outlook is based on the trends in the underlying economic fundamentals at the end of 2004. As last year ended, most U.S. manufacturers enjoyed improving balance sheets, favorable financing conditions, and a gradually declining currency. These trends, combined with expected moderation in the prices of resins and energy products in 2005 will ensure that the cyclical upswing in global demand for virtually all types of plastics products will remain intact for at least the next few quarters.

Despite the sharp rise in resins costs in 2004, profitability for many segments of the plastics industry has recently improved. Gains from currency conversion have helped both exporters of plastics goods and also producers who compete with imported products in the domestic markets. Stronger demand has resulted in a return of pricing power for some, and virtually all processors have benefited from efficiency enhancements.

Other trends also presage a continued expansion for plastics processors. As 2004 ended, unfilled orders for capital goods remained at high levels, so shipments will remain strong in the first half of 2005. And the excessively lean inventories in the manufacturing sector will likely generate some inventory building during the coming months.

The high costs of crude oil and natural gas have been a drag on most segments of the economy, but not all. Higher energy costs have spurred demand by energy consumers for products that enhance energy efficiency. And energy suppliers are demanding more products that are used to produce and distribute energy goods.

The recent price trends indicate that energy prices are heading down. After posting a high this past October at over $55 per barrel, crude oil prices have declined to the level of $45 per barrel. Inventories have been replenished as domestic production in the Gulf of Mexico has returned to the pre-hurricanes level. Imports also continue at a vigorous pace.

The elevated prices have predictably resulted in a flurry of drilling activity both inside and outside the U.S., and the global rig count is at its highest level since 1985 before the collapse of oil prices the following year. Commercial crude oil and natural gas stocks are at or above the five-year averages for this time of year, and are well above the levels of one year ago. Additional global capacity continues to come on line, and this should prompt further moderation in prices by spring.

So as far as inputs are concerned, resins costs will remain at relatively high levels, and the price of healthcare and other employee-related costs will continue to increase. But these input costs will be offset by continued productivity gains and moderating energy costs which will not only push the costs of resins down, but it will also lower the costs of operating factories and transporting goods.

Revenues for plastics processors are expected to rise 6%-8% in 2005, which is about the same growth rate as in 2004. Demand from industries such as aerospace, defense, medical, and telecom equipment will experience the strongest rates of growth. Gains in interest-rate sensitive industries such as building materials and the auto sector will weaken. Residential construction will be less of a driver of overall U.S. economic growth in 2004, but many segments of the commercial construction sector are set to strengthen.

Capital investment in the plastics industry will rise again in 2005, and the growth rate is forecast to be as good or better than the 10%-15% gain in 2004. The factors underpinning this projected increase in spending include: pent-up demand for new technologies and equipment, increasing returns on capital, favorable financing conditions, expanding profit margins, and healthier corporate balance sheets.