The state of the plastics industry could aptly be described as The Good, the Bad and the Ugly, if only the word ``good'' were missing.
Product demand is down and operating costs are on the rise. The credit market has dried up, making it difficult to buy or sell. The dollar is getting weaker and taxes are almost certainly going to rise.
There is nearly no market force working in favor of plastics manufacturers right now, and this new Wall Street-induced round of economic punches could score several kill shots.
``It's a terrible situation,'' said Jim Gillette, financial services director at Northville, Mich.-based consulting firm CSM Worldwide, in a telephone interview. ``The problem with the firms [making commodity products] is that they're getting hit hard with the underlying resin costs and feedstock costs; and on the other side, they're getting hit because the demand is going to drive them below their break-even point. It's not going to surprise me if we see some pretty significant bankruptcies in the plastics industry.''
The big issue for plastics companies moving forward will be: ``What's the overall demand going to look like?'' Gillette said.
Overall household wealth has declined. The result is less spending. And less spending equals bad news for plastics manufacturers that make products for consumer products categories.
Generally speaking, companies making high-margin, specialized products for the industrial sectors in which demand won't weaken will come out of this unscathed, industry watchers said. But those companies that manufacture in the consumer products market have a tough row ahead.
``If you're in food processing, chemical processing, energy, you're doing all right. I know the packaging and industrial guys very well. There are no signs of blood on the floor there,'' said Peter Mooney, president of Advance, N.C.-based Plastics Custom Research Services. ``With the consumer products industry, there is a pullback of consumer spending and we're still getting a lot of imports of these products. It's all discretionary spending. Boats, housing, home electronics, RVs — the sorts of things people would go out and do on the weekend.''
Bill Ridenour, owner of Polymer Transaction Advisors Inc. of Newbury, Ohio, concurred.
``If you're a supplier of high-volume commodity processed parts — sheet, film compounds or resin — you're going to be adversely affected by even-higher oil prices, or if nothing is done as far as the bailout, difficulty getting the capital necessary to maintain existing business,'' he said.
As unpopular as a proposed bailout of failing financial institutions on Wall Street is with many tax payers, there will be far-reaching consequences if it does not happen, Ridenour said.
``It's going to be difficult for private equity to obtain lending on acquisitions,'' he said. ``The terms will be stiffer, the interest rate higher, and the amount of money will be less. It will significantly impact [mergers and acquisitions] markets.''
His outlook for plastics suppliers to the construction and automotive industries was not rosy.
``If you're an automotive manufacturer, you're going to see a bloody disaster,'' he said. ``If you're a person who builds new houses, you're up the creek, too. You're in a recession anyhow. There are so many houses on the market because of failed subprime loans, so you've got a glut of relatively new housing that's competing with the brand new housing, which is why construction is down so much.''
Ridenour sees the proposed government bailout of quasi-governmental lending institutions Fannie Mae and Freddie Mac as a necessary evil.
``I think if the government wants to prevent us from going into a multiyear recession, they have to come in and prop up these financial institutions; otherwise, we have a financial disaster of biblical proportions,'' he said. ``It's not a pleasant dilemma in which we find ourselves.''
Only companies making specialized, proprietary, high-margin products for noncyclical markets will come out unscathed, Ridenour said.
Speaking to the necessity of the bailout, he added: ``When you consider all of the dollars we're going to have to print, it can only weaken the dollar further.
``So that's going to have some adverse impact on the strength of the dollar and our ability to buy oil. It's going to affect us all. So, there is no positive impact to the plastics industry.''
Many plastics manufacturers are getting hurt because of huge fixed costs in their business, Gillette said.
``What they did a few years ago is, they put a huge investment in automated mixing and blending equipment. It gave them a tremendous capacity increase to deliver product,'' he said. ``When you get high fixed cost vs. variable costs, the profitability of a company goes up dramatically. But, if you have demand drop off, you're going to have profitability problems — you're just not going to make as much money.
``I'm seeing a lot of plastics operations that are probably in the same boat,'' he said.