To celebrate Plastics News' 20th anniversary, we continue our weekly countdown of the Top 20 issues of lasting impact, as reported in our pages. The series will end with the No. 1 issue in our 20th Anniversary special edition March 16.
This week: No. 4: Plastics industry faces tough times
Plastics News has witnessed three recessions in America since its 1989 launch, but the downturns of 1990-91 and 2001-03 were milder than the ongoing economic crisis, the worst since the 1930s. This is certainly a unique time in history for the plastics industry the third-largest manufacturing industry in the United States.
The immediate problem is at least twofold.
First, even after government bailout intervention, banks still are not lending to businesses. As auto supplier Magna International Inc.'s Chairman Frank Stronach recently pointed out, many suppliers are in trouble because they cannot get loans from banks. Auto suppliers, in particular, suffer from cash flow shortages due to the long-existing payment problems of a troubled auto industry.
Second, the demand for plastic parts and products is dwindling in the construction, automotive and appliance industries.
Consumers worldwide, under the pressure of macroeconomic forces, are trimming or delaying discretional spending, especially for such big-ticket items as homes and cars. Moreover, struggling carmakers are squeezing suppliers harder than ever, in order to meet bailout requirements. Chrysler LLC, for instance, has ordered a new round of price cuts from all suppliers effective April 1. Certainly, other markets are less affected by the crisis, such as medical and packaging.
While the end of the crisis is not yet in sight, let's step back and revisit the pre-crisis economy, which featured easy credit, the housing bubble and the commodity boom. All of these had a direct impact on the plastics industry. Easy credit fueled capacity expansions. The housing bubble inflated demand for plastic pipe, profiles, siding and major appliances. And the commodities boom magnified the volatility of resin prices.
The crisis began with the collapse of subprime mortgages in the U.S., then turned into a credit squeeze and financial meltdown that quickly spread to the rest of the world. The global downturn caused production to halt, trade to tumble, commodity prices to tank, investment to flee and unemployment to soar. The global nature of the plastics industry has been vividly illustrated in this cross-continental storm.
Take resin makers, for instance. Resin has been the only category in the U.S. plastics industry that has sustained a growing trade surplus since 2002. According to data from the Society of the Plastics Industry Inc. in Washington, U.S. net resin exports remained stable between 1997 and 2003, but swelled to a surplus in 2004. Between 2006 and 2007, the U.S. resin trade surplus grew by 37 percent. A big chunk of that resin was exported to countries like Mexico and China. But when the global economic downturn hammered plastic product exporters in those countries, resin demand quickly cooled. Resin makers had no choice but to shut down excess capacity and cut jobs in the U.S.
By the same token, U.S. exports of plastic molds, machinery and products all racking up trade deficits for over a decade are bound to suffer more as demand for such items declines in the global marketplace. Unfortunately, there just isn't much if any room left in the U.S. domestic market to absorb the excess.
To solve today's challenges, the U.S. needs long-term planning to revitalize its manufacturing as a whole.
The United States has been looking for growth elsewhere not in manufacturing. Information technology was thought to be a powerful economic force until the dot-com bubble burst in 2001. The financial sector was a significant engine of growth until the current crisis.
As the U.S. looks to re-start its engines, it needs a solid foundation and real value creation. Making money from money should be replaced by making money from making.
Specifically, U.S. plastics manufacturing stands to benefit from more government support that helps the industry to access credit, improve productivity and promote innovations. For example, companies can receive an immediate boost from tax breaks that reward the use of state-of-the-art technologies, automation, and energy efficiency.
Trade protectionist measures may ease some pressure at the moment, but in the long run will hurt U.S. competitiveness not just against China, but against the rest of the world.
Sun is a Plastics News assistant managing editor and Asia specialist.