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Plastics: Relying on Innovation to Ride Out the Recession

The collapse of the auto industry has hit the plastics industry hard. But new medical products and greener plastics are keeping the industry moving forward.

June/July 09
Plastic piping is expected to be a growth market as infrastructure projects expand
Plastic piping is expected to be a growth market as infrastructure projects expand
Plastics are still ubiquitous, but the industry as a whole in the United States is becoming less so. However, fewer players in the plastics processing business means less capacity and more work for the larger, stronger companies that remain. This strength has been badly needed by an industry in which over-capacitation of recent years has meant less leverage with large original equipment manufacturers, and that translates into less profitability.

Polymer Transactions is a Cleveland, Ohio-based firm that tracks plastics industry movement such as acquisitions, consolidations, foreclosures, plant closings, and bankruptcies. "The current general economic snapshot certainly applies to the injection molding industry [the largest plastics processing segment], especially in certain market segments such as automotive, construction, major home appliances, and any other segments that manufacture `big ticket' items, the purchase of which can be postponed in a recession," says Bill Ridenour, Polymer Transactions' CEO. "Business values of publicly owned companies have also declined to 45 percent of their high, based on the Dow [Jones] Industrial Average highs and lows for the past 15 months, and senior lending for business financing has nearly dried up, especially for acquisition financing." He predicts that by 2010, the population of plastic processors will decline by as much as 20 percent, in spite of the many consumer markets and industry segments that are relatively immune from the recession.

Thomas E. Blaige, CEO and managing partner for Thomas Blaige & Company LLC in Chicago, notes in his recent report, 2009 Injection Molding M&A Market Update, that the "effects of global consolidation in the fragmented injection molding markets have resulted in an increase in the number of deals from 57 in 2002 to 105 in 2007 and to 104 in 2008." However, he projects that purchase prices will be attractive for those injection molders that "possess a defensible niche."

"Injection molding companies will continue to get squeezed as suppliers and customers continue to grow and gain leverage," says Blaige in the report. "Those with volume less than $100 million will continue to see their negotiating leverage decline, and suppliers are continuing to tighten credit and to week out non-core customers, reflecting a flight to quality." He also says that increasing raw material prices haven't done the industry any favors. Rising prices to processors and a reluctance of customers to accept price increases have generally meant shrinking margins and reduced profitability.

Auto Decline Hurts Industry
The economic slump that has impacted almost every segment of plastics processing has hurt many states that once counted on a strong plastics industry to serve other large OEMs in markets such as building and construction, automotive, medical, packaging, and almost every other segment where plastics are ubiquitous. Michigan has been hardest hit, with many Tier One and Tier Two suppliers being sucked into the eddy of a deepening auto recession.

The credit crunch has left smaller plastics processors and mold manufacturers in a bind, even as they seek to collect from their automotive customers. Many have shuttered their plants and walked away, unable to extend credit lines. Some companies have been lucky enough to sell their businesses. Monomoy Capital Partners LP, the owner of Fortis Plastics LLC of South Bend, Indiana, purchased the assets and operations of resin compounder Global Thermoplastics LP. This represented the fourth acquisition made by the New York-based private equity group in eight months. Monomoy started on its plastics binge in 2008 when it bought the custom molding divisions of Leggett & Platt Inc. and Atlantis Plastics Inc. and started Fortis. It then added Moll Industries Inc.'s Ramos, Arizipe, Mexico, plant in February 2009 to expand Fortis' reach.

Medical Market a Bright Spot
In spite of the doom and gloom of the automotive industry, there are bright spots for the plastics industry; medical products is one of them. Demand for medical plastics in the United States is forecast to expand 2.6 percent annually to five billion pounds in 2012, valued at $6.55 billion, according to The Freedonia Group, an Ohio-based industry research firm. The trend reflects a shift to an older demographic, resulting in a rising incidence of acute and chronic conditions and thus an increasing volume of patient activity that will broaden overall demand for medical devices, supplies, and packaging. Demand for commodity plastics - PVC, polypropylene, polyethylene, and polystyrene - used in the production and packaging of medical products is expected to rise 2.3 percent yearly to 4.3 billion pounds in 2012, valued at $4.6 billion.

The Freedonia Group report says engineering plastics accounted for 11 percent of the total volume of medical plastics in 2007, but a much higher 27 percent of total value. Demand for engineering plastics such as polycarbonate, which is expected to remain the leading engineering resin and exhibit the best growth prospects, is expected to expand 5.2 percent annually to 630 million pounds in 2012, reaching nearly $2 billion. Advances will be based on needs for higher performing materials in surgical instruments, diagnostic testing, drug delivery, geriatric care and preventative medicine.

Medical molding continues to be strong, particularly in the area of medical disposables, minimally invasive surgical devices and diagnostics equipment. MedPlast Group is a medical molder/contract manufacturer that was put together just over a year ago, and rapidly gained ground through a series of acquisitions, which is becoming a new paradigm in the molding business.

Led by Harold Faig, the group's CEO, investors put MedPlast together to meet the unique, ongoing needs of the medical market. The investors simultaneously purchased ATP's Engineered Rubber and Plastics Group and K&W Medical Specialties in April 2008, forming a world-class manufacturer in the medical device market under the umbrella of MedPlast. The newly created company has manufacturing facilities in Westfield, Massachusetts; Tempe, Arizona; Elkhorn, Wisconsin; West Berlin, New Jersey; and Monticello, Iowa. Between all five plants, MedPlast has over 750 employees.
Packaging Products
Packaging continues to be strong for the plastics industry and has overall been less prone to "offshore" manufacturing threats than other markets due to the fact that most OEMs want their packaging suppliers close; because of the light weight of the products, shipping long distances by air isn't cost effective and not something that OEMs are inclined to do.

Packaging for food products is strong as well. Point-of-purchasing for food take-out remains a good bet in plastic packaging. Sabert Corporation, headquartered in Sayerville, New Jersey, celebrated the grand opening of its new, 250,000-square-foot manufacturing facility in Hillview, Kentucky, near Louisville. The company thermoforms disposable plastic food packaging such as deli take-out packaging, food service trays, utensils, and other food packaging solutions. Sabert made an initial investment of $35 million in the plant which is on a 72-acre site, and was granted $2 million in tax benefits by the Kentucky Economic Development Finance Authority. The new plant is expected to employ 100 people.

Green packaging continues to hover on the fringes, and while it remains primarily a niche product, U.S. demand for green packaging is projected to increase 3.4 percent annually to $43.9 billion in 2013, using 59 billion pounds of material, according to The Freedonia Group. The fastest gains are anticipated for biodegradable plastic packaging and plastic recycled content packaging. Biodegradable plastic packaging is forecast to climb nearly 13 percent per year through 2013, driven by increased price competitiveness with conventional resins, rapidly expanding capacity, and lower pricing volatility than petroleum-based plastic packaging materials.

Packaging is a key component of medical products as well, with demand for sterile medical packaging projected to climb 6.1 percent per year to $6.5 billion in 2012, representing nearly 37 billion units, per The Freedonia Group. Again, growth will be fueled by the shift to an older demographic, and upward trends in patient activity will broaden the overall use of sterile medical products, impacting favorably on demand for related packaging.

A decline in surgical procedures and advances in minimally invasive surgical techniques will reduce demand somewhat in those areas, but the growing role of specialized outpatient facilities in providing healthcare services will boost opportunities for sterile medical products and related packaging such as thermoformed trays, pouches, bottles, sterilization wrap, blister and clamshell packs, and IV and blood containers.

The Freedonia Group says the fastest gains are expected in pharmaceutical and biological applications delivered via injection or inhalation, supporting above-average gains for prefillable syringes, vials and ampules, prefillable inhalers and closures. Demand will also be aided by widening preferences for safe, unit-dose delivery systems.

Building and Construction
Green issues are also on the forefront of the building and construction industry. While the housing market has been in a slump, makers of building and construction products haven't slowed their pace in developing "green" alternative materials, making use of recycled plastics as well as developing new products using a variety polymers.

Interior applications for plastics are many and varied, some of which might surprise home buyers. For example, for the third year in a row, Fypon, a leading manufacturer of urethane and PVC millwork products, has achieved three separate number-one brand rankings in the 2009 Brand Use Study sponsored by Builder magazine. The next time you go into a home with soaring columns, beautiful crown molding and other decorative millwork, you might be surprised to learn it's PVC or urethane.

Products have moved well beyond vinyl siding, which is available in new and improved products, into decking, fencing, railing, and roofing materials in a variety of styles and colors. Decking has long been a primary end use for recycled plastics and wood-plastic composites. Trex, headquartered in Winchester, Virginia, was an early entrant into the plastic decking market, coming out with its product 16 years ago. Today, Trex is recognized for products in decking, railing, fencing, and trim for low-maintenance outdoor applications.

According to The Freedonia Group, U.S. demand for alternative decking materials, specifically wood-plastic composite decking, is forecast to rise 9.5 percent annually to 700 million lineal feet, while demand for plastic and other decking is projected to advance 9.7 percent annually to 135 million lineal feet in 2013. That far outpaces demand for wood decking, which is projected to advance less that 1 percent per year through 2013. Consumers like alternative decking materials because of their long lifespans, minimal maintenance requirements, and imperviousness to degradation caused by general wear and tear and long-term exposure to moisture. In addition to performance characteristics, the new products on the market closely resemble natural wood, can be cut like wood decking, and are environmentally friendly in their use of recycled plastics in production.

In siding, TechWood North America of Greenwood, South Carolina, extrudes a wood-plastic composite siding using a mix of 75 percent long-wood fibers and 25 percent virgin polypropylene. CertainTeed of Valley Forge, Pennsylvania, recently introduced its Cedar Impressions Naturals plastic shake siding that features the look of cedar-treated wood with a semi-transparent stain but is in fact injection molded from polypropylene.
Roofing has become a huge market for polymer materials, and a number of companies have jumped into this market with various styles and colors of polymer roofing products. Bayer MaterialScience's Ce-DUR is molded from Baydur 630 rigid polyurethane foam. EcoStar, a division of Carlisle Construction Materials in Carlisle, Pennsylvania, offers injection molded roofing shingles with an 80 percent recycled compound that includes both thermoplastics and rubber. DaVinci Roofscapes of Kansas City, Kansas, recently announced it supplied the company's new line of DaVinci EcoBlend roofing tiles for the 4,300-square-foot Green Life Smart Life home project in Narragansett, Rhode Island.

Buying American, Rebuilding America
If the state of the U.S. economy has done anything, it's made the "Made in the USA" label much more popular. More and more manufacturers and retailers are using U.S-manufactured products as a hook for attracting buyers. Additionally, the cost gap between products made in overseas low-cost countries such as China and made in the U.S. has closed significantly over the past few years, making it more cost-viable to produce plastic goods in this country.

JM Eagle, the world's largest manufacturer of large-diameter plastic pipe, plans to be at the forefront of the Obama administration's efforts to rebuild the country's crumbling water infrastructure. The Los Angeles-headquartered company recently announced the introduction of its Eagle Corr PE (Dual Wall) pipe with a corrugated exterior wall and smooth interior wall, to be used in a variety of gravity flow applications, and is ideal for storm sewer systems.

As infrastructure replacement projects grow, pipe promises to be an exceptionally good growth market. The Freedonia Group confirms that large diameter plastic pipe provides optimum growth opportunities, with demand reaching some 50 million feet, nearly one-quarter of demand of all types of pipe, by 2012. Plastic pipe advances will be driven by resin advances such as bimodal polyethylene and molecularly oriented PVC, which will extend the pressure resistance and other properties of large diameter plastic pipe. The best opportunities will exist for large diameter PVC pipe. 

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