For the fifth consecutive year, our Pipe Business Index registered an overall gain in 2006, expanding 2% over the previous year. The Index is a measure of total market demand for plastic pipe. Unfortunately, the accompanying chart illustrates that this indicator hit a major cyclical peak in the fall of last year, and this Index was heading downward at the start of 2007. We expect this downtrend to persist throughout most of this year, and the Index will decline 5% in 2007.
It is no surprise that the market for plastic pipe correlates closely with the trend in construction spending, particularly on residential projects. In 2006, residential construction spending declined about 2%. The drop in new housing starts was even more severe, as this important leading indicator plummeted 13% last year. These two indicators are expected to hit their cyclical bottoms later this year, and residential construction will likely return to positive growth in 2008. That will in turn push up demand for all types of plastic building materials. But this will not be soon enough to avoid a decline in pipe demand in 2007.
One bright spot in our outlook for this year is that growth in nonresidential spending will be relatively solid. The nonresidential sector accounts for about 45% of all construction spending, and last year it grew a healthy 13%. Highway and street spending advanced 15%, water-supply projects grew 11%, and outlays for sewage and waste disposal jumped 17%. At present, nonresidential projects use proportionally less plastic pipe than residential projects do, but plastics usage is growing there, too.
By far the two biggest materials used for making plastic pipe are PVC and HDPE. There is a rule of thumb that growth in annual demand for PVC pipe will be the same as growth in the overall U.S. GDP. This has been a pretty good predictor over the long run, but there can be significant divergence in the short-run. Real GDP expanded by about 3% last year, and the growth will be very close to this in 2007. But countering this growth in the overall economy, market demand for PVC pipe and fittings was slightly negative in 2006, and the drop will be 7% this year.
The market for HDPE pipe is only about one-third as big as that for PVC pipe, but the growth trend is much stronger. Demand for HDPE pipe expanded 15% in 2006, and growth of at least 10% is expected this year. This pattern will hold for both corrugated and non-corrugated products.
Demand for HDPE pipe will benefit from the aforementioned strong levels of spending for nonresidential construction projects and the increasing penetration into markets currently dominated by pipe made of concrete and metal. HDPE already has a strong position in natural-gas distribution, but it accounts for much smaller shares of water distribution and drainage pipe in highway and street construction. Plastic pipe is usually cheaper to purchase and to install than pipe made of traditional materials. Lower cost, less susceptibility to corrosion, and thus longer life than many other types of pipe will help keep demand for HDPE pipe rising steadily for the foreseeable future.
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.