Film and sheet extruders building momentum

After a shaky start to the year, activity levels for extruders of film and sheet improved substantially in the second quarter of 2015. This strong recovery demonstrates that this sector can do well at times when the overall economy is expanding at only a moderate rate of growth. And there is evidence to indicate that demand for plastic film and sheet will accelerate as soon as the U.S. economy start to gain speed in the coming months.

This outlook is based on the trend that emerged in the latest Plastics News Business Monitor Index for film and sheet extruders. The index registered a strong 125.5 in the second quarter. This represents a robust increase from the value of 101.2 that was posted in the first quarter. A value above 100 indicates that overall business levels increased when compared with the previous quarter. Keep in mind that a reading of 125.5 does not mean that total business activity jumped by 25.5 percent, but it does indicate that the upward momentum in this sector accelerated significantly during the second quarter.

The film and sheet segment was one of the strongest performers in our second quarter survey. At 125.5, the index for film and sheet was considerably higher than the 112.2 index value for the entire plastics industry. In other words, this sector accelerated faster than all of the other sectors in the plastics industry last spring. It must be noted that the film and sheet sector was one of the weakest performers in the first quarter of this year. So the strong performance this quarter may partly be due to some catching up, or what economist like to call “regression to the mean.” But a closer look at the data reveals that this segment should continue to be a reliable performer for the foreseeable future.

As the numbers on the table show, all of the sub-indices that we calculate as part of our film and sheet index posted strong gains from their first quarter levels. The most crucial of these was in the new orders category. That sub-index was an outstanding 159.6. This means that 70 percent of our large pool of respondents reported an increase in new orders.

When the new orders level is this strong it drives increases in all of the other categories. Production levels ramped up substantially, and there were still enough new orders to create a large (and therefore rare) increase in backlogs. This surge in new business also resulted in an escalation in the number of employees for the quarter.

Other gains

So those were the most noticeable gains that emerged from the data, but there are a couple of other numbers that caught my eye.

The first is the small gain reported in the sub-index for export orders. A large number of our respondents probably do not have any export sales; therefore this sector of the industry was relatively insulated from the effects of the sharp rise in the value of the dollar earlier this year. Nevertheless, there were a few more respondents who reported of an increase in export sales than a decrease. A trend of steady-to-higher export orders during a time of a strong dollar is a sign of solid market demand.

The other number that caught my eye was the reported overall gain in prices received. This is rare in the plastics industry at this time because of the recent trend of falling resin prices. Most processors from other sectors of the plastics industry reported the prices they received in the second quarter were lower, but that they still maintained healthy margins due to the decline in resin prices. For the film and sheet sector however, there is a strong indication that the prices they are getting are steady-to-higher. This is another indicator of strengthening market demand.

We include a question about profitability in our survey, and 60 percent of the film and sheet producers who responded expect to be even more profitable in the coming months than they were in the second quarter. This is the highest proportion of optimists in the whole plastics industry.

Not surprisingly, the sharp increase in business levels and profit is clearly evident in the sub-indices for both future expectations and capital spending plans. And here again, these values were the strongest in the industry when compared with the sub-indices from the other industry segments.

This sector tends to perform well when there is strong growth in consumer spending. For the past six years, this recovery has been characterized by consistent, but still disappointing annual growth of only about 2 percent in consumer spending. This pace has been sufficient to generate less than-spectacular demand for plastic film and sheet products. But in recent months there is evidence to suggest that the rate of consumer spending is starting to rise.

Crucial consumer sector indicators such as housing starts and auto sales are at post-recession highs and rising. The recent trends in both of these end-markets provide clear evidence that consumers are starting to increase their spending activity. Real disposable personal incomes, bolstered by a combination of rising employment levels and lower energy costs, are headed towards their highest growth rate since 2006.

Historically, the film and sheet sector has thrived in these conditions. I do not expect the future index values to come in quite as high as it did in the second quarter. But my forecast does call for film and sheet demand to rise steadily and gradually through the end of 2016.