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April 14, 2016
Will North American plastics demand rise with new capacity and low feedstock prices?
By: Paul Bjacek

Over 23 billion pounds per year of new polymer (including PE, PVC, ABS, PET, PP, PS, EPS) capacity1 is likely to come on-stream in the United States by 2020 (see past blog), most justified based on low cost gas. This will allow the United States to be the second lowest cost region2 in the world for products such as polyethylene (see cost curve in past study). If all were to be used domestically, we calculate that it would mean adding 2,000 to 10,000 new plastic processing lines, depending on the type of plastic, process and application. However, much will likely be exported.

Will US plastics customers, that is, plastics processors (those that buy raw plastic resin and convert it to various products, like packaging materials, pipe, bottles and other finished products) be able to share in the bounty of low-cost feedstocks and abundant domestic resins production? There are signs on the horizon that they will.

Processors are betting on the home market
Our analysis indicates that domestic plastics processors (or “converters”) are gearing up to take advantage of the inevitable favorable price and volume position of North America when the new polymer plants start up. About 60 percent of plastics processing machinery used in the United States is imported3. Imported machinery data is, therefore, a very good barometer of plastics processors’ investment sentiment. Encouragingly, plastics and rubber machinery imports grew 9 percent per year between 2010 and 2015, with important items such as injection molding machine imports growing by up to 16 percent per year (as shown in Figure 1). This is consistent with American Chemistry Council analyses that indicate more than 500 plastic processor expansions have been announced since mid-20124. In fact, new equipment purchases are rising much faster than the capacity utilization increases in plastics and rubber products production (see Figure 2).

Is this unique to plastic processing or is it all US manufacturing?
We believe this phenomena is mainly related to the shale gas advantage and to plastics processing in particular.

The United States has advantages versus other economies in terms of the current exchange rate (see Figure 3), making equipment costs lower (imported aggregate plastics machinery values dropped 31 percent between 2010 and 2015), as well as an improving total labor cost differential with China, where China’s relative labor cost rose 36 percent over the past six years, as those of the United States declined by 6 percent (see Figure 4). It could be that processors were taking advantage of the low equipment prices based on exchange rates. However, we believe the manufacturing renaissance, where automation reduces the importance of labor costs, is a real occurrence, although muted a bit due to poor world economic growth (see our past study, “Global Shifts in Industrial Investment”).

While these low labor and equipment costs bode well for US manufacturing, plastics processing is doing even better. As a matter of fact, after several years of weaker performance versus total manufacturing, plastics processing has outperformed total manufacturing output in the United State since the end of 2011, as shown in Figure 5 by the ratio of plastics to manufacturing output. Manufacturing grew by 1.8 percent per year between December 2011 and December 2015 versus 4.1 percent per year for plastic products manufacturing—there is a plastics advantage, indeed! But there is another positive trend that could bode well for US plastics production.

The price gap
The gap of US domestic plastics prices versus those of Southeast Asia has been widening over the past few years, as shown in Figure 6. As new North American capacity comes on-stream and domestic producers battle for market share, domestic prices may move toward the levels of the largest importing region, Asia. This would narrow the competitive gap between Asian plastics processors and those of the United States, and allow US processors to push back on imported plastic products, increase exported plastic products and raise plastic products production beyond the old growth rates of 4 to 4.5 percent per year.

Avoiding missing the local bus versus the export boat
North America holds strong prospects for growth, especially in megatrend-linked markets. For instance, over the next five years, US gross output in construction, consumer electronics and medical equipment is expected to grow over 4.5 percent per year5. Innovative plastics applications geared towards these markets can even experience higher growth. The aging population, for example, is requiring more healthcare-related products that can assist in mobility and convenience. Strong, lightweight materials can enable electric mobility devices to do more with less energy.

North American polymer producers must prove the worth of their business to these demanding domestic customers in order to maintain market value and share. As assessed in a past blog, producers must innovate in product, service and efficiency to serve the high demands of domestic customers. For instance, some innovations of value to automobile manufacturers’ include the integration of electronics (like sensors) into plastic trim, adding color to parts that eliminates the need to use paint, making rapid changes to specifications and supplying global needs with consistent product6.

The US finished goods manufacturers that survived manufacturing offshoring trends in the early part of this century are the most nimble, efficient, resourceful and demanding of resin suppliers. Therefore suppliers need to focus on:

  • Maintaining strong understanding and forethought into future market dynamics

  • Being trusted, consistent and reliable suppliers, globally

  • Providing innovative products and transaction/supply chain processes

  • Improving plant operations and harnessing new sensing devices and analytical tools to enable predictive maintenance and improve speed, reliability and quality


Figure sources:
1 Accenture Research analysis of US International Trade Commission data
2 Accenture Research analysis of US International Trade Commission data and US Federal Reserve Board data
3 Accenture Research analysis of Federal Reserve Bank data
4 Accenture Research analysis of Oxford Economics, March 2016
5 Accenture Research analysis of US Board of Governors of the Federal Reserve System data
6 Nexant data from December 2015 for high density polyethylene (injection molding grade), low density polyethylene and linear low density polyethylene

Footnotes:

1 Based on Nexant data.

2 Nexant data for 4Q2015 indicates that the US and Canada, as a region, are the second lowest cost for ethylene production.

3 “2015 Global Business Trends,” SPI: The Plastics Industry Trade Association, December 2015, www.plasticsindustry.org/trends.

4 Esposito, Frank. “Processors want new resin capacity to stay in the US,” Plastics News, October 30, 2015, http://www.plasticsnews.com/article/20151030/NEWS/151039973/processors-want-new-resin-capacity-to-stay-in-the-us.

5 According to real US gross output forecasts from Oxford Economics, March 2, 2016.

6 Kavanaugh, Catherine. “Speakers: Key to auto challenges is early involvement by supply chain,” Plastics News, January 14, 2016, http://www.plasticsnews.com/article/20160114/NEWS/160119865/speakers-key-to-auto-challenges-is-early-involvement-by-supply-chain.

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