The most widely reported trend in the plastics industry in 2005 was undoubtedly the rapid rise in the price of resins during the second half of the year.

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The most widely reported trend in the plastics industry in 2005 was undoubtedly the rapid rise in the price of resins during the second half of the year. As we all know by now, prices started the year at very high levels, ticked downward in the summer, and then skyrocketed to new highs following Hurricanes Katrina and Rita. But as it turned out, the hurricanes were not the only factor that pushed prices higher in the third and fourth quarters of 2005. It is now clear from the trends in other plastics industry data that strong growth in market demand was also a factor. And the good news is that while resin prices appeared to stabilize (and in some cases decline) as 2006 got underway, the momentum in processor activity seemed to be accelerating.

As we reported in this column last month, the Federal Reserve Board’s index that measures total output of plastics products in the U.S. exhibited a strong surge at the end of 2005. This index expanded at an annual rate of less than 2% through last summer, but it then accelerated to a growth rate of 5% in the fall. The latest reading for this index was 109.7 (2002 = 100), and it is climbing rapidly. This level of production is 6% higher than the last cyclical peak hit in the first quarter of 2001. We expect the data to maintain this momentum through the end of the year, and our latest forecast calls for total U.S. output of plastics product to expand by 4%-5% in 2006.

The Fed’s corresponding data on the capacity utilization rate for the plastics industry also advanced during the last four months of 2005. This data hovered near the 85%-level through the first half of last year, but then jumped up to over 89% by year’s end. The last time the industry’s operating rates were this high was during the halcyon years of 1996 and 1997. So while it is clear that the hurricanes negatively affected the price of resins and other petroleum products, it is also clear that the post-hurricane period was one of strong growth in the output of plastics products.

There are a couple of other trends that suggest that this increase in processor activity will continue in 2006. The first is the trend in the dollar value of the shipments of plastics goods. The Fed’s data referenced above measures the volume of production of plastics products. The Census Bureau compiles and reports data on the dollar value of plastics shipments. As mentioned earlier, the volume of plastics production was accelerating at the end of 2005, but for the year as a whole the total growth in output will be about 3%. By comparison, the dollar value of plastics products shipped actually expanded at a rate closer to 10% in 2005. This discrepancy indicates that there was a price increase for some types of plastics products, but in also suggests that there was a strong increase in demand for higher-value products.

One final trend that bodes well for the plastics industry is the trend in the ratio of inventories to shipments. The aforementioned increases in production and operating rates would not be very exciting if the extra product was just filling up somebody’s warehouses. But the I/S ratio for the plastics industry headed downward in the second half of 2005, and it is currently quite low. This indicates that producers will need to increase production levels if they are to meet any future increases in market demand. This is already occurring in several segments. Shortages of plastics pipe are being reported in some regions of the U.S., and anecdotes about the inability of pipe extruders to keep up with demand are increasing.

The net effect of all of these trends is a very positive outlook for the plastics industry in 2006 and beyond. Sure, resin prices are still too high, and we all know that a substantial amount of production volume has been off-shored to China. Both of these factors have resulted in a much slower recovery from the last recession than might otherwise have been expected. But while the overall growth in the industry has been slow, it is apparent that all of the low-value production lost to overseas has been replaced by increased output of higher-value products. High resin prices have resulted in a sharp increase in products that increase efficiency, productivity, and value. And many of these products are made of plastic.