Canada's plastics industry faces a tough year in 2006 as it struggles with high costs and a strong currency.
Natural gas prices will likely remain high in lock step with U.S. prices still recovering from Gulf Coast hurricane damage. This boosts costs for a range of energy inputs for processors and other sectors in the industry. And high gas costs, of course, also have strengthened plastic resin prices, eroding processors' profit margins.
``A lot of companies are looking to improve efficiency,'' said Atul Sharma, chief economist and executive director for the Ontario region of the Canadian Plastics Industry Association.
This year follows a relatively strong 2005 when processors did not have to face energy and resin spikes for a full year. Sharma said in a telephone interview that Canadian processor shipments in 2005 were on track for nearly 6 percent growth, about the average for the sector in the previous five years. Sharma calculates processors shipped about C$23 billion (US$19.7 billion ) worth of goods in 2005.
Sharma is less pessimistic than some economists about the impact of Canada's stronger dollar on its manufacturers' abilities to export.
``Many companies have incorporated already the effects of a higher dollar,'' he said from CPIA's head office in Mississauga, Ontario. ``The rise has been a long time in coming.''
Although the dollar's strength can be painful for many manufacturers, those dependent on imported materials can see some costs decline. Such is the case for processors forced to import resins not made in Canada.
Bank of Montreal predicts manufacturers will weather the strong dollar better in 2006 after being hurt by it in 2005. It expects the dollar to stabilize in 2006. It ended 2005 at nearly US$0.86 after beginning the year at about US$0.83.
The Conference Board of Canada expects the country's real gross domestic product to grow to 3.1 percent in 2006 from 2.7 percent in 2005. It foresees strongest growth in geographic areas that export basic resources such as oil and minerals, which are enjoying high global prices. Western Canadian provinces rich in petroleum and minerals and developing resource sectors in Newfoundland and Labrador are among Canada's bright spots, the board predicts.
Canadian firms have become more cautious about business prospects, according to a survey by the Canadian Manufacturers & Exporters association. Only 32 percent of the respondents reported improved business conditions in 2005, and fewer expect conditions to improve in 2006, noted CME Senior Vice President and chief economist Jayson Myers in a summary of the survey.
Companies are responding to growing world competition by upgrading the workforce, improving productivity, innovation, managing supply chains, investing in technology and entering new markets, CME found.
CPIA's Sharma identified border-crossing issues as a continuing concern for Canadian plastics firms that export to the United States. The United States and Canada are slowly coming up with solutions to traffic choke points in the Windsor-Detroit and Buffalo areas, but more stringent identification rules might lead to other delays.
New passport regulations could slow processing of transport drivers entering the United States and thus clog traffic at U.S. border points, Sharma explained. U.S. government proposals could see such regulations beginning to come into play by 2007.
``Each driver would need more documentation,'' Sharma added. Much Canada-U.S. trade is based on just-in-time delivery schedules. Canadian exporters recall horrific delays after the World Trade Center attacks in 2001 when all traffic entering the United States faced unprecedented scrutiny.
Some of Canada's fundamental benchmarks are in good shape as 2006 begins. The Canadian unemployment rate, at about 6.4 percent, is its lowest in 30 years. Business investment is predicted to grow 9.1 percent this year, according to Toronto-Dominion Bank. Statistics Canada reported machinery imports were up 2.7 percent in late 2005, which bodes well for productivity improvements in industry overall.