Special Report — Fighting Back: Reasons to Believe

With the exception of a small number of pessimists, most economists and executives believed the basic economic fundamentals were in place for an economic upturn sometime in early 2002. This was before the September 11 terrorist attacks in New York and Washington.

While, at the time this report was written (late September), the full extent of the economic fallout from the attacks was anyone’s guess, the short-term impact on the economy has been devastating. In the first two weeks after the bombings, the Dow Jones Industrial average lost over 14 percent of its value, its worst decline since 1933. Unemployment has spiked upward as Canadian and U.S. airlines plan to lay off as many as 100,000 workers, with the effects expected to spread through the tourism industry, aircraft manufacturing and other sectors. Capital investments and expansion plans at many companies have been canceled or put on hold. In the U.S., which buys 85 percent of all manufactured goods exported by Canada, the consumer confidence index fell to its lowest level since the 1991 Gulf War.

Gloomy, yes, but a situation which, because of its extraordinary nature, needs to be kept in perspective. Even before September 11, many plastics processors had been experiencing some of the classic signs of a slowdown – machine utilization had declined, inventory had risen, sales were down, and, in some cases, employees were laid off. And yet, many companies were growing, with some on target to a banner year.

This paradox of some doing well while others are hammered is reflected on a much larger scale by the statements of economists who say the Canadian economy is giving off mixed signals about its condition, and that this downturn is unlike any that has ever been seen before. Using statistics to measure the slump is also more difficult than normal owing to a change in the way Statistics Canada reports its information. In the past, the plastics sector was regarded separately from the synthetic rubber one. Now, the two are combined, requiring more analysis to tease out the desired data, and resulting in a less-than-perfect picture.

On the surface, it appears the first six months of 2001 were not bad in the plastics-processing sector. Overall, shipments were 5.2% above those in the same period in 2000. This compares favourably with the numbers for all of 2000, when shipments were up 5.4% over 1999.

According to Faris Shammas, the Canadian Plastics Industry Association economist and executive director for Ontario, the plastics industry shipped products worth $30.8 billion in 2000. If the 5.2% gain in shipments over the first half of 2001 maintains itself for the rest of the year, the value of total shipments could end up somewhere like $32.4 billion. But Shammas doubts this will happen.

When we dig a bit deeper, and factor in Gross Domestic Product (GDP) figures for the first six months of 2001, the bloom comes off the rose. Said Shammas: “The real GDP of plastics products for the first half of the year is down 1.3%. That means most of the shipment increases were probably generated by price increases rather than volume.” Shammas explained that StatsCan defines shipments as the number or units of manufactured widgets times the price. Added Shammas: “So if real GDP is falling, that means the number of widgets you are selling is down, but the price has increased to offset some of that loss.” This explanation is consistent with the observations made by several company managers.

One size doesn’t fit all

Examining the plastic shipment numbers in more detail shows that some sub-sectors did just fine during the first half of 2001. Urethane foam and all other foam shipments were up 9.3%. Plastic plumbing fixtures were up 16%, and plastic bottles were on a tear at 26.3%. And motor vehicle parts — which were hurt in late 2000 — showed some growth at 3.4%. In the negative column were laminated plastic plate sheet and shape products, which were down 10%, while polystyrene foam was essentially flat at minus 0.7%.

Of course, what happens to plastics processors is usually determined by conditions within the manufacturing sector as a whole, both domestically and internationally. In both 1999 and 2000, the Canadian manufacturing sector experienced its strongest gains since 1995, making the declines in 2001 even harder to swallow.

By December 2000, motor vehicle manufacturers had curtailed production in response to high retail inventories and lower-than-expected demand, which had begun a few months earlier. This decline continued in 2001, and in January, the motor vehicle industry reached a 28-month low in shipments. However, it began to rebound in March.

Meanwhile, makers of computers and electronics products — who had a good year in 2000 — also saw a decline in shipments as the global demand for their gadgets began to shrink. This industry remains in a slump.

In both these sectors, shipments either declined or simply wobbled up and down for the first half of this year. By July, automakers had cut back shipments by 14.6% versus the same period in 2000, while shipments of computer and electronic products had declined 42% from their August 2000 peak. Plastics processors serving these markets were similarly affected.

Typical of processors located close to the auto industry in Ontario is Peter Gaffney, general manager of Ritz Plastics Inc. in Peterborough, ON. Said Gaffney: “We do quite a bit of automotive, about 75 per cent, and we were already hit way back in December 2000 to February 2001. Back in the first quarter, we went to a four-day week for six weeks and we took a week’s vacation to try and adjust inventories because we weren’t shipping as anticipated.” Gaffney reported that business has begun to pick up again, and this is reflected in the latest (pre-attack) manufacturing statistics, which showed that the automotive sector was growing again in both Canada and the U.S.

Using industrial capacity utilization as another measure, the utilization rate for Canadian industry as a whole had fallen for four consecutive quarters by the end of June, but comparing the second quarter of 2001 against the same period in 2000, it actually rose to 84.1 percent from 80.8 percent for plastics production.

Another characteristic of the Canadian plastics-processing industry that has both helped and hindered the industry in these tough economic times is the rising importance of exports.

Starting in 1999, Canada achieved a net trade surplus in plastic products with the U.S. While the CPIA’s Shammas stresses that his export numbers are not ironclad because one can not calculate the exact value of the plastic components incorporated into autos that are exported, the rest of the plastics industry exported shipments worth $6.3 billion in 2000. This was to all countries, but exports to the U.S. represented the lion’s share: $5.9 billion. That same year, imports from the U.S. were worth $5.3 billion, giving Canada its second trade surplus in plastics products two years in a row. By all accounts, the US economy has been hurt more than Canada’s, and real shipments by U.S. plastics processors are expected to decline by at least 3.5% in 2001. Nonetheless, many company managers in Canada say that going after business in the U.S. was one of the first things they did when they first experienced the downturn, and most who did that say it was a winning strategy.

Another complicating factor is resin prices that rose sharply last year, squeezing processors at both ends and causing much concern for many. Although resin prices were still rising in January, they have since fallen. By the end of July 2001, production of polyethylene resin, for example, had risen 11.9% over the same period last year, easing the supply crunch.

Are the economic fundamentals still there? Many experts believe so, giving credence to the belief that the recession (conceded by most economists) will be short-lived. Prior to the attacks, new home sales in Canada had increased for three straight months. A standard 30-year fixed mortgage rate fell to an average 6.72% and may go lower if, as expected,
the U.S. Federal Reserve cuts the prime rate for the ninth consecutive time in October (pre-press). In the U.S., consumer spending, which represents two-thirds of the country’s economic growth, has held up well throughout most of 2001. The big question is whether and when companies will begin to reverse their policies of canceling or delaying capital investments.

“We’re expecting a short recession — over by March,” said Jeffrey Joerres, CEO of Manpower Inc., in recent article published in the New York Times. “Our new horizon is next September.”