Outlook for U.S. Economy and Plastics Markets
Post-Katrina (and Rita) Plastics Industry
Outlook
The prices of plastics resins were very high before
Hurricane Katrina hit, and the subsequent disruption to the petrochemical
refining and shipping infrastructure has catapulted prices even higher.
It is estimated that nearly 10% of the North American
refinery capacity for some of the major commodity resins feedstocks was
shut down as the result of the hurricane.
The full extent that this disaster will have on the
plastics industry will depend on how quickly the petroleum refineries that
produce ethylene, styrene, and propylene monomers are brought back on
line. And it will also depend on how quickly the waterways, railways, and
highways used for shipping such products are re-built. For the next few
months at least, the effects on the plastics industry will be substantial.
There were a number of plants near
the Gulf Coast that produce resins that were actually shut down before the
storm hit as a precautionary measure. So days of production have been lost
even though most of these resins plants were not significantly damaged and
are now beginning to come back on line. The market has also lost the
ability to access hundreds of railcars used to ship resins, many of which
were already loaded with product awaiting delivery. The days of lost
production, surging feedstock costs, and the inability to get empty
railcars to the plants and deliver full railcars to customers will combine
to keep upward pressure on resins prices for the immediate future.
According to data just released by
the Federal Reserve Board, growth in the industrial production of plastics
products in August was pretty good. Their index for plastics product was
107.0 (1997=100) which was 2% higher than the previous month’s output.
Total U.S. production of all industrial products was essentially flat;
however, much of the weakness was related to Katrina.
The Fed estimates that without the
hurricane, growth for August would have been a sturdy 0.4%, instead of the
actual 0.1%. Not surprisingly, the storm most affected those industries
concentrated on the Gulf Coast, including oil and gas extraction,
chemicals manufacturing, and petroleum refining. The negative effects on
total industrial production from Katrina will be larger in September
because in August the storm only affected output at the end of the month.
The capacity utilization rate for the
plastics industry also ticked higher in August, and the latest reading was
above 84%. Tighter capacity utilization will give processors greater
pricing power, which will allow them to pass on some of the increases in
resins prices that they have incurred. The capacity utilization rate
should move even higher in the wake of Katrina, as processors unaffected
by the storm try to make up for lost production on the Gulf. Farther out
into the future, there will also be a significant increase in demand for
plastic building materials and plastics packaging for food and beverages
though the spike in energy and resins prices are a downside risk to
near-term industrial production.
As for the overall U.S. economy, Katrina will have a
measurable negative impact on total GDP through the end of this year, but
it will actually result in stronger growth and lower inflation in 2006.
Prior to the storm, real GDP in the U.S. was expanding at a rate of nearly
4% per year. For the remainder of this year, the growth rate will
decelerate to closer to 3%. But even with this deceleration, the economy
will perform at a level that is close to its long-term, non-inflationary
growth rate.
Very soon, massive amounts of insurance money and
government aid (perhaps as much as $200 billion) will begin to pour into
the Gulf region. This will increase the Federal budget deficit in the long
run, but it will also provide a strong stimulus to the economy in 2006.
Energy prices will begin to fall as soon as the supply infrastructure is
repaired, and the uncertainty and unemployment that currently prevails in
the region will transform into rising confidence and employment levels as
the clean-up effort hits full stride. By this time next year, the effects
of Katrina on the economy and the plastics industry will be largely behind
us.
--Bill Wood,
Plastics Market Economist
Mountaintop Economics & Research, Inc.
