Risks across the cycle

The Canadian plastics processing industry is near the bottom of the most severe business cycle ever experienced. But this is a cycle, just like all the others, and a recovery is coming. The trick is managing the risks and sticking to a strategy.

The North American and European economies fell into a recession in the fall of 2008. The cause of the current problems is a loss of confidence in political and economic leadership and institutions. The plastics industry in Canada was ahead of the cycle with shipments and production declines that began in 2005. The winter of 2008-2009 will be the darkest period. The earliest likely time for a general recovery will be during 2010.

This commentary divides the cycle — from the middle of 2005 to 2010 — into five stages and describes circumstances and risks at each stage.

ANATOMY OF A CRISIS

The crisis for the plastics industry began in the middle of 2005 when the Canadian dollar rose past US$ 0.80 and North American vehicle production and housing began a cyclical decline. Many Canadian processors were vulnerable to offshore competition. Canadian shipments began a slow decline, while the industry was still growing in the rest of the world. The major risk was a loss of market share — especially in the United States.

During the summer of 2007 the U. S. sub-prime mortgage crisis depressed activity in the U. S. Declines in Canadian plastics shipments accelerated across all markets. Higher costs and lower product prices squeezed profits. Financial losses and employment cut backs became common. Risks shifted to a loss of equity and many firms moved to the U. S. or were taken over by U. S. companies.

The full-blown global financial crisis began during the summer of 2008. A recession began during the third quarter and will continue until the summer of 2009. Risks are simply survival and all attention is focused on cash and the balance sheet. Orders are falling and receivables go unpaid, as credit availability for customers becomes a concern. Market risks are most severe in the vehicle sector with declining North American production (and the survival of GM, Ford and Chrysler) as the biggest risk.

The financial crisis will ease during the winter as confidence builds in new leaders and policies. American consumer spending will be slow to respond, but low prices and pent up demand for housing and vehicles will prompt new purchases. Employment and orders will be growing again, energy and resin costs much lower, during the summer of 2009, but activity will be far below past trends. Prices will be low and margins limited. Risks at this time will be attached to customer relationships and finding sales in the markets that recover first.

WEATHERING THE STORM

Economic recovery will restore production growth to historic rates during 2010. Plastics processing will lead and media reporting of the recovery may not be apparent until late in the year. Survivors will be a part of the new “polymer processing” industry with capabilities in sustainable products, hybrid materials, mass customization and value added products. These four elements are at the centre of the Plastics Technology Road Map, developed by the industry in 2007. All of the economic and technological fundamentals driving that vision are in place. It just gets harder to see them emerging through the risks and losses of the recession.

The risk that spans the entire cycle is that industry and political leaders will lose sight of the strategic vision. If they drop investments in technology, lay off experienced engineers and managers and cancel training programs, Canada will miss out on the jobs, profits and prosperity that will grow in the new polymer materials industry.

Bill Empey is a managing partner at Prism Economics and Analysis, a Toronto-based consulting firm serving clients with economics, industrial-labour relations, and social research expertise.