Your Business Outlook - July 2006

Nearly a year later, the U.S. plastics industry is still feeling the effects of last year’s disastrous hurricane season, but most processors appear to have found ways to manage. According to data from the Federal Reserve Board, output of processed plastics is up 3.5% in the past 12 months and growth is accelerating. In the two quarters since hurricanes Katrina and Rita, plastics processing advanced at a 5% clip. At current rates, 2006 will be 5% higher than 2005. Capacity utilization for processors looks equally impressive. The latest data show them operating at over 90% of capacity, which is 5% above this time last year and well above the long-term average.

This has occurred despite substantial disruptions in domestic resin supply. The Fed’s data indicate that U.S. resin production declined 6% in the past 12 months. Resin output dropped 10% for 2005 and dropped another 3% so far in 2006. Domestic output of resins at present is 5% lower than it was 10 years ago.

 

Imports fill the gap

These figures are clear evidence of rising resin imports. Some market segments have been more affected by imports than others, as is evident in our Extrusion Business Index. The majority of plastics products by volume are extruded, and the largest plastics segment by volume is extruded film. The data suggest that this segment is also the one that has suffered the most from high-priced resins and from imports—of finished products. Our Film Business Index has dropped 10% in the past year, and it is down more than 15% for the past six months. This Index is heavily influenced by the consumption of U.S.-made film resins, so these figures likely overstate the true decline in film production, some of which was based on imported resin.

For most U.S. producers, film is a high-volume, low-margin market where raw materials can represent as much as 70% of the total manufacturing cost. As a result, this segment is acutely vulnerable to high resin prices. Further, films are less bulky to ship than resins, so much of the imported plastic is coming ashore in the form of film. It appears increasingly clear that production of commodity-grade films like those for shopping bags or dry cleaning is moving overseas.

The second largest segment of domestic plastics is pipe, and here the story is much different. Unlike film, plastic pipe is quite difficult to ship cost-effectively, and our Pipe Business Index has grown by 3% in the past year. The biggest sector is PVC pipe, and the trend there correlates with those in residential construction. New home construction is down about 5% for the year to date, but the level is still quite high by historical standards, and spending on residential repairs and remodeling is still expanding.

The strongest growth in construction this year will come from nonresidential projects, which continue to drive demand for HDPE pipe. Spending on non-residential construction increased 10% in the past 12 months and shows no signs of slowing. Our indicator of activity in corrugated HDPE pipe is up 20% for the past year and jumped nearly 50% so far in 2006. Activity in smooth-wall pipe is up 5% for the past 12 months and up 15% so far in 2006.

Also enjoying solid growth are vinyl windows and doors. Our Window/Door Business Index escalated 7% over the past year and is growing at a 10% clip so far in 2006. Despite moderating growth in residential construction, demand for PVC windows will remain strong—partly because they help fight the soaring cost of home heating.

Plastic sheet is a relatively small market compared with film and pipe, but it continues to grow steadily. Our Sheet Business Index indicates that despite the spike in resin prices, demand for plastics sheet surged in 2004 and 2005. Production looks set to rise 4% to 5% in 2006.

 

Bill Wood, an independent economist specializing in the plastics industry, heads his own firm, Mountaintop Economics & Research, Inc. in Greenfield, Mass. He may be contacted by e-mail: BillWood@PlasticsEconomics.com