Processors expect rising profits in 2015

Plastics News Research just released the results from our Business Monitor survey for the first quarter, and this latest batch of information is both illuminating and encouraging.

The Plastics News Business Monitor Index for the first quarter is 104.3. This indicates the overall activity level for plastics processors expanded in the latest three months when compared with the previous quarter (a value above 100 indicates an increase).

There were strong gains in new orders, production levels and employees. These gains were partially offset by decreases in the categories of export orders, prices received and backlogs.

At first glance, the 104.3 score suggests that the recent uptrend for plastics processors decelerated in the first quarter compared with the fourth quarter of 2014, when our index value was 107.8. This deceleration would be consistent with other indicators of U.S. manufacturing activity so far this year. The latest data from the Federal Reserve Board indicates that the total U.S. output of manufactured products has been flat for the past two quarters.

And there are several reasons why the manufacturing sector has plateaued in recent months: severe winter weather; labor problems at West Coast ports; declining activity in the oil patch resulting from a drop in the price of crude oil; and perhaps most importantly, a decrease in export demand due to the sharp increase in the value of the dollar.

Plastics processors are no doubt affected by these trends in the macro-level manufacturing indicators. But here is where the story told by our Business Monitor survey gets interesting.

Plastics outperforming manufacturing

Our data indicate that the plastics industry outperformed the overall manufacturing sector in the first quarter (our Index shows an increase in business activity levels, not a plateau). Our data also suggest that the plastics industry is poised to continue the trend of stronger-than-average growth as the recovery in the overall U.S. economy and manufacturing sector start to accelerate again in the second quarter.

Clearly, the decrease in export orders resulted in a bit of a drag on our Index. Export orders were either flat or down for all of our process categories. This should be expected because the value of the dollar has spiked up dramatically in recent months. But overall new orders and production levels for plastics processors advanced at a strong pace. I believe the rise in the value of the dollar is actually benefiting many segments of the domestic plastics industry.

This is because the sharp increase in the dollar has corresponded with an equally sharp decline in the price of crude oil. The relationship is a little too complicated for me to explain in this column. But the really good news is the significant decline in the price of plastics resins. We see from our data that the prices received by processors have declined, which suggests that processors are passing along some of their savings to their customers.

Basic economic theory teaches us that lower prices should encourage increased demand (hence the solid rise in new orders). It is also likely that lower gasoline prices allow consumers to allocate spending to other things, most notably packaging products.

Rising profits

So resins prices are declining, and prices received by processors are declining. Now the question becomes, “What about margins?”

Fortunately, our survey includes a question on expectations for profitability. It turns out that 52 percent of the processors that responded to our survey expect to be more profitable in 2015 than they were last year. This is an increase of 5 percentage points from the fourth quarter survey.

So to summarize: Our data indicate that the stronger dollar is hurting export demand, but lower oil prices that are the result of a stronger dollar are enhancing domestic demand for plastics products and improving overall profitability because of lower resins prices.

If we break the data down by type of process, the strongest categories in the first quarter are compounding, rotational molding and injection molding. With the exception of extrusion of pipe/profile/tubing, all of the process categories registered a net increase in new orders in the first quarter.

It is worth noting that all of the process categories are strongly optimistic about the future, and all categories report a net increase in capital spending levels in 2015 when compared with the previous year.

As for end markets, a consistent theme emerges in our data. Virtually all of the major end markets for plastics products are expected to improve in 2015. The strongest expectations are for packaging, automotive, and agriculture/lawn and garden.