By K. John Gutshaw & David S. Laszlo, Wadley Donovan Gutshaw Consulting
Plastics production is essentially a two-phased process that begins with the raw material preparation and manufacturing of polymer resins. This product, typically in the form of pellets or beads, is then shipped to fabrication sites where the material is formed into final plastic products. Several processing methods are utilized depending on the type of product, i.e. extrusion (film), injection molding (containers), blow molding (bottles) or rotational molding (hollow plastic items).
The industry’s significant global economic influence is undeniable – with annual plastics production reaching 288 million metric tons. The same holds true in the U.S., where we see an extraordinary impact on the economy. Consider: Plastics is the third largest industry within the manufacturing sector, employing 892,000 people (or 6.7 of every 1,000 non-farm jobs); reported annual shipments of $373 billion and capital investment expenditures of $9.6 billion; and, 15,949 manufacturing facilities spread across all 50 states.
Fabrication – the second phase – is the critical workforce driver, claiming 91 percent of the U.S. plastics employment and creating 33,446 net new jobs over the past four years (resin production employment gained just 3,344 workers in that period). As the industry grows, a wave of new technology is changing the traditional manufacturing process and the requisite workforce skills. The new age of plastics includes:
- A shift from traditional feedstock.
- Bioplastics and recycling lead the industry’s push into green technologies.
- Expanding U.S. shale developments offer new raw material supplies and a lower cost energy resource.
- Automation through robotics, resulting in more efficient and lower cost production.
- 3-D Printing applications advance the fabrication process with maximum efficiency.
Geographic Concentration and Location Trends
The US-based plastics industry historically locates in proximity to other supporting industry clusters, which results in different location criteria for the two key manufacturing phases. The industry’s top states for resin production and fabrication employment are presented in the accompanying table and the market dynamics encourage a shift in location patterns.
Resin producers locate close to the raw material extraction and feedstock. Initially the location focus was on the Texas and Louisiana crude oil fields. Until 2008 little new capacity was programmed; however, the emergence of shale-based natural gas has shifted the U.S. industry into a new production era, the effects of which are just beginning. Shale gas can be processed into ethylene, a key feedstock for many plastics and resin manufacturers are swiftly deploying new steam cracker plants to capture this resource. Dow Chemical alone has a capital budget of $80 billion for new plant construction. Industry-wide activity includes:
- A potential 42 percent increase in ethylene production capacity over the next three years;
- By 2017 five new facilities are scheduled for the Gulf Coast region (adding 6,250 kt/year capacity); plus,
- The stage is set for the development of a second petrochemicals hub in the Marcellus basin, where new plants are proposed for West Virginia (Aither Chemicals), Pennsylvania (Shell Chemical), and Ohio (Appalachian Resins).
Fabrication Processors prefer close proximity to their primary markets to avoid extended shipping costs. Customers, moreover, prefer processors to be nearby for shorter service and delivery, collaboration on product design, and greater flexibility in adjusting production output. The more visible end users include transportation (auto/aerospace), packaging, construction, electrical/electronic, and appliance manufacturers. Where these industry clusters exist, so do the plastics fabricators.
As feed stock production grows outside of the Gulf Coast region, trends will support a narrowing distance between plastic suppliers and fabricators. The location attraction of resin producers to the Marcellus basin (Ohio, Pennsylvania, and West Virginia) will bring production closer to the north central fabrication markets; moreover, fabricators are now seeking co-location with the resin produced by recycling processors and bioplastics production favors the nation’s agricultural heartland.
For the entire industry, a trained and ready workforce is critical. Growing employment, innovation, and emerging rural resin production areas support the need for a larger workforce having sophisticated skills – ranging from polymer chemists and engineers, to machinists, molders, and technicians. The accompanying map confirms a close correlation between the nation’s plastics employment concentration and the supporting universities/technical schools that offer related programs. Those areas that can best serve the training needs will have the edge in capturing the Industry’s next generation of new jobs. In the southeast, North Carolina ranks among the best prepared.
U.S. Market Will Emerge as a Global Industry Leader
The stage is set for a rebirth in the U.S. plastics industry. Like a perfect storm, multiple market dynamics are emerging at the same time that will bring unprecedented growth and a potential industrial renaissance to the nation’s shale gas regions. The growing fortunes of the U.S. plastics industry are supported by the following key drivers:
- The shale gas revolution is the primary kick-start. Industry experts expect U.S. resin production capacities will outpace China, Europe, Latin America – and feedstock costs will become globally competitive, particularly against China. US exports will benefit.
- Lower costs however will not be realized until 2017, after the nation’s first shale gas-to-polyethylene plant goes online. Thereafter, growing supplies will shift the industry into a buyer’s market.
- The growing economic impacts are enormous; consider the current investment of $100 billion in 148 major projects across the U.S. and the new job creation expected within construction (485,000), resin production/fabrication (65,000), and related support functions (50,000).
- Reshoring from China is supported by the changing economics and business model:
- U.S. labor cost penalties are narrowing, as China continues a programmatic national increase in the minimum wage that began in 2008.
- Avoidance of higher logistical costs and associated transportation lead time.
- Desire for a smaller environmental footprint.
- Facilitating product innovation by consolidating offshore manufacturing with US-based engineering teams.
- Plastics demand is on the rise for packaging material and lightweight plastic in autos and aircraft.
- ‘Made in USA’ campaigns are gaining momentum demonstrated by Walmart’s pledge to purchase $250 billion of merchandise exclusively from U.S. manufacturers over the next 10 years.
- Industry employers are projecting higher levels of U.S. productivity and profit margins from a combination of contributing factors beyond the lower feedstock and energy costs of shale gas:
- Robotics support lower manpower needs for producing equivalent output. The results are stabilizing and/or lowering labor costs, despite the industry’s employment growth outlook.
- The U.S. is shifting from machine hourly rates (which favor low-cost countries) to more specialized higher-valued-added products, such as medical devices.
- Furloughed facilities from off-shoring may again be an option to reduce start-up costs and ease regulatory compliance through grandfathered site restrictions.
- The current trend in higher sales volume allows processors to negotiate customer contracts more aggressively.
The Industry Upside will be Challenged
The new market dynamics bring significant opportunities to the U.S. plastics industry, but multiple exposures place the full economic potentials at risk. These include:
- Shortage of skilled labor: For any given plastics manufacturing site, WDGC recommends a minimum workforce threshold of 75 workers per hire possessing adaptable production skills. On that basis, an employer staffing 50 hourly workers would require a labor pool of 3,750 to ensure selective recruitment. Research however reveals only 65 (18 percent) of 370 U.S. metros offer a sufficient critical mass for operations of that size or larger. The industry’s future is less than certain until the necessary educational training resources are mobilized.
- The extraordinary cost of petrochemical projects. Capital expenditures can reach several billions of dollars that may ultimately support a less aggressive roll-out of new plants. Given the level of investment, supportive state and local business incentives can influence the site selection decision. Key considerations include tax abatements, tax credits or payroll withholding reimbursements, site infrastructure funds, sales tax exemptions and employee training assistance.
- The less certain future supply-demand balance of ethylene. New U.S. capacity, along with construction of new plants in the Middle East, Asia, Canada, and South America may outpace the worldwide demand. The resulting downward pressure on product pricing could adversely impact industry investment.
As the industry enters a new era of expansion perhaps the most unsettling challenge relates to the public health and environmental implications. Current U.S. plastics production could increase by 50 percent, creating 42 billion pounds of polyethylene plastic annually. At current production levels estimates reveal 10 to 20 million metric tons of plastic are discarded into the oceans annually, costing $13 billion in environmental damage to marine ecosystems. Moreover, the optimism for greener, renewable biobased plastics is diminishing with the prospects of lower cost oil and gas feedstocks.
Both increasing production and plastic use support the critical and timely need for reducing waste. Proposed initiatives by the United Nations include corporate targets and deadlines for greater resource efficiency and recycling, along with more aggressive awareness campaigns to reduce littering and ocean discharge. Recycling potentials are exhibited in Mexico where successful conservation efforts result in 60 percent recovery and recycling of PET plastic bottles. This compares to only 31 percent in the U.S. Much can and needs be done to improve the industry’s environmental footprint. The future will hold a stronger commitment and continuing investment in the nation’s recycling infrastructure.