For China's plastics industry, slowdown may be over but rebound's not in sight

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If an optimist sees a glass half-full and a pessimist sees it half-empty, what do you call someone who can't decide what they see?

You might call them a plastics company trying to decipher China's manufacturing environment today.

Late November reports from publicly traded plastics firms and analysts pointed to a "murky" and "uncertain" picture, with suggestions the worst may be over from this year's slowdown but with no solid rebound in view.

For example, China's second-largest maker of plastics machinery, Chen Hsong Holdings Ltd., said Nov. 27 that sales within the country rose only 4 percent for the half-year ending September 30.

Easier credit in China in recent months did bring a small recovery, but the company said plastics factories remained cautious in investment and looking to the government for signals.

"A tight monetary policy adopted by the new central government in China — crucial for economic stability in the long term — will unavoidably lead to short-term pains," the Hong Kong-based company said. "The market in China for the second half of this financial year continued to be veiled in uncertainty, heavily dependent on the Central Government's policy direction and degree of credit tightening."

Hong Kong-based injection molding company Karrie International Holdings Ltd. saw half-year sales drop 21 percent in its plastics molding and metal parts division, prompting the company to say in its Nov. 28 earnings report that it was stepping-up investments in robots and automation.

And plastic toy maker Lung Cheong International Holdings Ltd. said Nov. 28 that half-year sales dropped 19 percent, which it attributed to worldwide economic problems.

It was not all bad news. Others reported better results.

Chen Hsong's smaller rival L.K. Technology Holdings Ltd. said sales in its plastic machinery unit rose 13 percent on strong demand in China, and colorant and engineering plastics compounder Ngai Hing Hong said healthy sales in China were the main driver pushing revenues up 14 percent to a record HK $1.86 billion (US $239.9 million) in the year ending June 30.

But Ngai Hing Hong was hardly celebrating, striking a cautious tone about the future amid challenges within China and Europe.

"With the unresolved euro-zone crisis… and the ongoing slowdown in Mainland China's economic growth, the group will continue to face challenges in the second half of 2013," it said. "However, recovery of the U.S. economy has helped stabilize exports in China, which the management believes will present opportunities to the global market and the price of raw materials should become stable."

Surveying China's manufacturing industries in a Nov. 27 analysis, the U.S.-based Manufacturers Alliance for Productivity and Innovation said the picture was "murky."

"While recent Chinese data have suggested a bottoming of the sharp slowdown in Asia's largest economy, there is no sense of a definitive rebound on the short-term horizon," according to MAPI, which is based in Arlington, Va. "Economic growth stabilized during the third quarter primarily because of a gradual recovery in exports and public investment."

MAPI predicted that manufacturing in China would see moderately slower growth, from 9.2 percent this year to 9 percent in 2014, as overall GDP growth slowed from 7.3 percent this year to 7.1 percent in 2014.

The country's largest plastics trade group, the China Plastics Processing Industry Association, estimated in early November that the industry grew 5 percent in the first nine months of the year, a sizable slowdown from double-digit increases in recent years.

"Such a muted forecast likely foreshadows an extended period of slower growth as the country confronts a sluggish world economy, increasingly difficult demographic challenges impacting labor supply" and the need to rebalance its economy toward domestic private consumption, MAPI said.

Still, the plastics firms reporting financial results were continuing with investments in new capacity, as they looked for longer-term opportunities. And even with the slowdown, the growth in China's large plastics industry still outpaces the world's other large plastics economies.

LK was building a new production base in Zhongshan, Guangdong province. Ngai Hing Hong said it would continue to expand its sales networks in mainland China, where it's focused significant resources in the last few years, and it said it expected to benefit from increased Chinese exports and a gradual recovery in the U.S. economy.

And Chen Hsong said it was nearly finished with a previously announced 88,000 square meter expansion of factory space in Shenzhen, to give it more capacity in ultra-large tonnage presses and help it achieve what it called a leadership position in that sector.

It said it planned to deliver a 6,500 ton injection molding machine, the largest yet manufactured in Asia, to a customer in early 2014.

International sales for Chen Hsong also suffered in the period. It said it saw encouraging signs from its efforts to grow in markets like Brazil and Europe, but noted that overall international sales still fell seven percent in the half-year because of rapidly depreciating currencies in some major developing economies.

Emerging market Southeast Asian currencies generally declined at least 10 percent against the U.S. dollar in the period, the company said. All in all, it left Chen Hsong suggesting the status-quo wouldn't be so bad.

"The group is of the view that China GDP should maintain at its current growth rate of 7-8 percent and that, barring unforeseen circumstances, it is expected that stability in the group's business development can be ensured," the company said.