By James R. Kinnett II, CEcD, EDFP, The Kinnett Consulting Group and Partner in CKK-Group, LLC
There is both abundant good news and limited bad news for the continuously evolving Plastics Industry. First the bad news, with the unstable situations in Europe and the Middle East, and the declining economy in China the world wide growth is basically stuck in neutral. As noted by HIS Chief Economist Nariman Behravesh at the Global Plastics Summit 2015 in October, “We’ve seen slowdowns in labor force growth and productivity, and global economic growth of 2.5-2.8 percent annually since 2011 is well below the average of the previous two decades.” He also added that austerity and debt have been “major headwinds” to economic growth.
These factors, along with monetary issues from around the world, are making the playing field for plastics a somewhat difficult industry to maneuver. An example is the trouble being experienced in Mexico. Since the beginning of 2015 the Mexican peso has dropped 25 percent against the U.S. Dollar and this has created a serious concern in the Mexican plastics industry. The industry currently imports approximately 60 percent of the polymers being processed there, and the currency fluctuation is having a large impact on the costs of these raw materials. Another international factor that is looming in the future is the African marketplace. While relatively small at this time, the fact that world exports of plastics and rubber machinery to Africa have gone up from about $719.4 million in 2009 to $971.2 million in 2014. This has been a continuous trend, actually since 2004, and there have been very few, if any, fluctuations in this trend in the last ten-year period. Africa could become the next largest producer of plastic products in the world.
Another issue affecting the industry is workforce and aging equipment. With the overall workforce beginning its constriction, companies are finding it difficult to maintain an effective and well trained workforce. This is driving many businesses to consider technology versus employees to fill the gap, i.e.; the trend towards utilizing robots on the line. The shear fact that a robot can work 24/7, 7/52 for about an equivalent personnel wage of $3 dollars per hour fully loaded. Another critical issue is the aging equipment found in most plastic processors facilities. As discussed in a recent article of Plastics News, Jeff Mengel of Plante & Moran, said that “In 2014, molding presses less than 100 tons were 14 years old on average and cost $25 dollars an hour to run without an operator, that compares to an average of eight-years old and $21 dollars an hour in 2004.” Reinvestment in newer more efficient machines needs to begin taking place to increase productivity and profits overall.
The good news about the industry is overall positive and greatly encouraging. Despite the earlier concern about stability in the world, the global plastics industry continues as a whole to remain robust, growing at a rate of two times GDP in nearly all of the global markets. The U.S. is the bright spot in that global economic picture. The short term economic growth for the next year should be 2.5 to 3 percent, with growth of 2 to 2.5 percent foreseen for the long-term. Part of the reasoning for such a prediction is the oversupply of oil and prices in the $40-50 per barrel range. When added to the corresponding supply of natural gas here in the U.S., the future looks quite solid for the whole industry with regard to pricing of product up and down the line. The contributions from shale gas are fueling 85 percent of all plastics made in the U.S. and are setting the table for what could be a renaissance for the plastics industry. As a result the industry is still maintaining a $16 billion dollar trade surplus, largely driven by the Free Trade Agreements in place with many key countries.
Productivity is another major factor affecting the overall growth of the industry. Injection molders have seen increases of 17 percent over the last ten years. In addition “gross profit margins inched up for the first time in four years” according to Jeff Mengel. When its comes to calculating profitability, “materials and labor are the biggest cost components in the four walls of a business. Yet, purposeful labor is one of a company’s greatest assets; these workers easily deal with shift changes and manage technical requirements. Companies then need to be dealing with the impacts of the ever-changing workforce, making sure they have the training and resources in place to maximize their investment in technology and equipment.
The sales of plastics machinery is another important factor impacting the trends in the industry. As noted earlier in this article, there is a significant need to upgrade and replace aging equipment and in the first quarter of 2015, the value of U.S. shipments of primary plastics machinery (injection molding, extrusion and blow molding) totaled $293.6 million, a gain of 2.9 percent compared to the same quarter the year earlier. Bill Wood, Plastics News economics editor stated in a recent SPI Report “Yet again, the quarterly CES shipments data posted a year-over-year gain. This is particularly encouraging in light of the slower-than-expected growth in the U.S. economy to start the year.” He also noted ”The U.S. economy will build momentum in the second half of 2015, and the market conditions that favor business investment in new equipment – low interest rates and rising aggregate demand – will continue to prevail.” In addition, CES reports that auxiliary equipment had new sales of $105.4 million in the first quarter, an increase of 6.9 percent from the same quarter last year. Wood “identified three main trends that will drive both economic growth and demand for plastics products; they are: low interest rates, low energy prices and rising wages and household incomes resulting from stronger employment levels.” An example of the estimates noted above, Milacron LLC reported second quarter sales of $301.3 million, up 1.8 percent from sales of 295.9 million a year ago. But when adjusted showed a gain of 8.2 percent overall for the quarter. This is an early indicator that companies are realizing the need for equipment upgrades and are beginning to make those changes to their businesses.
Many corporate executives have expressed optimism in the coming months, both for the overall economy and more specifically the Plastics Industry. And each sector has its own position and profile in this emerging marketplace.
Automotive – demand for polypropylene products are strong with the domestic automakers and the new domestics, particularly in Mexico. This trend will continue as auto sales continue to improve.
Packaging – Packaging continues to be quite strong. It is constantly changing with products like dishwashing pods impacting the bottle side of the business.
Health Care – Evolving of new designs and uses for product in the health care industry with improved barrier technologies.
Construction – centered on the home improvement side with emerging markets including siding, cladding, decking, fencing and windows along with new color enhancements.
Solar, wire and cable – Changes are being made in identifying solutions to long standing challenges in the wire and cable industry.
Bioplastics – An emerging segment in the plastics industry. It is estimated that the global market would grow at an annual rate of 14.8 percent to become a $30.8 billion dollar industry. Bioplastics are plastics derived from biomass: renewable feedstocks, such as corn, sugarcane and cellulose type plants and as a result have a smaller carbon footprint.
Plastics is still evolving and has significant room for growth as noted above. There are many different components to the industry itself, and by understanding how they work together, one can determine an area’s strength in creating the environment for the industry to prosper and grow. The industry has been relatively stagnant until recently and is now on the cusp of resurgence returning to a major industrial presence both in the world and here in the U.S.
Bio: Mr. Kinnett has been in the Economic and Community Development profession for over 37 years. He is currently President of The Kinnett Consulting Group. His company provides services including site location, incentive negotiations, loan packaging economic development consulting, strategic planning among numerous other related activities. Mr. Kinnett has worked with over thirty companies in assisting them on their location and financing issues.
He is a graduate Indiana State University, the National Development Council’s Economic Development Finance Courses, and local Leadership and Quality programs. He currently serves as Chairman of the Miami Valley Chapter-Society of Plastics Engineers. He has served on the Board of Directors of the International Economic Development Council, the Polymer Alliance Zone Board, the Region 4 WIB Board and the Board of the Caperton Center for Applied Technology.