Processors optimistic, show signs of growth

Business activity levels for North American plastics processors were steady-to-better in the fourth quarter of last year when compared with the previous quarter, and their expectations for conditions in the coming year improved.

That news is according to our latest survey of Plastics News subscribers.

Plastics News Business Monitor Index for the fourth quarter of 2015 is 104.6. This is a strong improvement from the third quarter when the Business Monitor Index was 98.7. A value above 100 indicates that business levels increased during the quarter.

The solid gains registered in new orders, production levels, and payrolls for processors in the fourth quarter were more than enough to offset a modest decline in export orders and shrinking backlogs.

Once again, there was a significant decrease reported in the prices that processors received for their products in the most recent quarter, but this is mostly due to the prevailing downtrend in the price of resins in 2015. The good news is that falling resins prices are proving to be a boon for most processors. Only 11 percent of the respondents expect to be less profitable in the coming year than they were in the previous year. This is down from 19 percent in the third quarter.

The improving expectations for profitability are also reflected in the capital spending plans. The past six years have witnessed a steady rise in spending for both new equipment and employees, and if things go as planned, 2016 will be another strong year investment by processors. At a value of 128.3 for the fourth quarter, the sub-index for capital spending plans is at its highest level of the entire year.

This continued improvement in the data from the North American plastics industry is a contrast to the performance of most other segments of the industrial sector. The trend in the data from the overall U.S. manufacturing sector was flat-to-down in the second half of last year. Many manufacturers are struggling with the conditions caused by a strong U.S. dollar, slow growth in many of the key export markets and a low price for most commodities (especially oil and natural gas).

But these conditions are favorable for many segments of the domestic plastics industry. Low commodity prices have resulted in lower materials costs for plastics processors, and the lower energy prices have put more money in the pockets of American consumers. Consumer spending increased by a moderate 2 to 3 percent in 2015, and this has pushed demand for many plastics products steadily higher.

At the present time, there are few reasons to believe that these trends will change much in 2016. The upward trends in the key drivers for increased consumer spending — higher wages and employment levels — are intact. Oil prices can turn around abruptly, but right now they are quite low and there is no obvious reason for this situation to change anytime soon. So the uptrend in households' disposable income accelerated in 2015.

So the outlook for all consumer markets looks good in 2016, but as always, some will expand faster than others. If we breakout the Business Monitor data by end market, some interesting insights emerge.

By far the strongest end market for plastics products is the medical sector. The many factors benefitting this sector include: a growing population, an aging population, an expanding economy, a rapid rate of technological advance and a rising number of insured consumers. Has there ever been a better time to be in the medical industry? It is not a question of “if” the medical sector will grow. The only question is, “How fast?” Our data suggest that prospects brightened considerably at the end of last year.

Other markets

Overall activity levels in both the packaging and the building/construction end markets went from moderately slower in the third quarter to moderately faster in the fourth quarter.

The trend in the packaging data is dependent on the overall growth rate in consumer spending in the U.S. The long-term trend in the personal consumption expenditure data released by the Bureau of Economic Analysis has exhibited steady growth of just over 2 percent for the past six years. This has resulted in a reliable expansion of right about 2 percent in demand for plastics packaging products. Now we all wish this would accelerate, and there is reason to believe that it might in 2016 — but probably not by too much.

The trend in the underlying data for demand from the building/construction end market is also expected to improve steadily this year. Total housing starts advanced by 10 percent in 2015, and the forecast calls for another gain in the range of 10 to 15 percent in 2016. This means that construction levels will remain well below the peak hit before the recession, but the growth in this sector should be more than enough to spur solid demand for plastic building materials in the coming year.

At first glance, it is surprising that the index for the automotive market is near the bottom of our list. After all, light vehicle sales hit an all-time record in 2015. But unless you are expecting another sales record in 2016, then a flat trend in the automotive data is not really bad. Auto sales should remain strong in 2016. Perhaps they will set another record, or maybe this will turn out to be the second best year of all-time. Either way, the market is at a high level, and the processors who supply it are not yet signaling a significant downturn at this time.