Fireside Chat: Historically Resilient Plastics Industry Faces Unprecedented Uncertainty
The plastics industry has proven its ability to withstand the economic uncertainties and societal pressures that have reshaped other markets. In our latest Fireside Chat, Andrew Reynolds of AMI and Dwight Morgan of M. Holland Company discussed how the industry is poised to maintain this strength, but only if companies embrace an agile and creative business approach in the face of powerful change.
“In a word, the plastics industry is resilient,” Morgan said. While not as robust a growth rate as prior years, plastics overall is expected to grow 1% in 2020. But that growth is not guaranteed to continue in future years if plastics businesses don’t evolve in response to uncertainty from changing trade policies and increasing demand for sustainable materials. The panelists agree these are the top issues impacting plastics today that will bring very dynamic changes to the industry going forward. “There is uncertainty, but there is also excitement,” Reynolds said. “There are a lot of opportunities here—so much dynamism in the way we’re developing technology and adjusting our services to meet new client needs.”
Plastics Must Rise to the Sustainability Challenge
Sustainability is one of the most significant pressures facing plastics companies today. “There’s no question sustainability is on another level right now,” Morgan said. Consumers have been the primary driver of the industry’s increased focus on sustainability, whether through demanding legislation or brands’ switching to non-plastics in packaging. And plastics companies are taking note. “At M. Holland, sustainability is the topic of conversation,” Morgan continued. “We’re getting regular requests for recycled materials, and our suppliers are making big investments in chemical recycling. Everyone is talking about it.”
According to Reynolds, plastic is no longer the obvious first choice for companies – and this new reality is putting new strains on the industry. He believes sustainability will determine the industry’s next 10 years and that its willingness to shift deep-seated thinking is critical to its longevity. “We’ve always been an industry that’s operated on the basis of science,” Reynolds explained. “Our problem is that the current market is being driven by emotion, not science. We need to figure out how to position our industry in both a scientific and emotional way.”
Plastics Must Weather Economic Uncertainty
In addition to sustainability pressure, market stress brought on by trade conflict is exacerbating an already uncertain outlook for the plastics industry, according to the panelists. When NAFTA came under scrutiny in 2018, the contentious discussions between Mexico, Canada, and United States administrations sounded alarms throughout the industry. Plastics businesses entered into a state of tremendous uncertainty, which materialized in the suspension of investments across the Americas. Shortly after, the United States and China became entrenched in an escalating trade war that had real and immediate implications on North American plastics businesses. “The U.S.-China trade conflict changed global trade routes in real-time. There were ships on their way to China that stopped, turned around, and dumped their cargo in Latin America,” Morgan said. The back and forth on the tariffs, even with the current truce, is casting doubt amongst already wary companies. “How do you do business in this kind of environment?” Morgan asked.
Smaller plastics businesses suffer more acutely than larger global companies because they have fewer resources to navigate an uncertain trade market. “Supply chain is critical,” Reynolds said. “If you have a complex supply chain that is suddenly disrupted, it’s difficult to make quick moves that get your processes back on track with fewer resources.” If plastics businesses want to remain globally competitive, they will need to make smart investments in markets that are relatively shielded from trade conflicts and find new demand for the polyethylene surplus accrued after the loss of the Chinese export market.
The U.S. Manufacturing Industry is in a Slow Recession
U.S. manufacturing has been on a decline for the past year, plagued by multiple quarters of negative growth. The manufacturing index in December 2019 was the lowest in 10 years, around the time of the Great Recession. Since manufacturing is only 10% of U.S. GDP, there hasn’t been a ripple effect across the nation. “I think we’ve hit bottom,” Morgan said. “There’s optimism that manufacturing activity will increase at least 1% this year in certain industries. And plastics manufacturing is better off than many other sectors.”
However, the manufacturing slowdown hasn’t deterred investors. “It’s not challenging to get access to capital right now, and private equity investors are looking for deals,” Reynolds said. Successful plastics companies have been building capital reserves, which allows them to invest in their growth or return value to shareholders. But some commoditized businesses are struggling to find ways to pay back on investments. “I worry that plastics investors might view commoditized markets as a low-yield investment and slow their activity there,” Reynolds said. Commoditized markets might find shelter in consolidation trends from top plastics businesses looking to grow through acquisitions, according to Morgan. “Because we’re in a slower growth market, you can’t count on industry growth to fuel higher earnings,” Morgan said. “So many businesses will look to consolidate.”
Morgan is particularly concerned about interest rates and industry trends for debt acquisition. “A lot of companies are borrowing, buying back stock, and raising dividends to pay back shareholders,” Morgan explained. “As a country, we should be concerned that national debt is approaching GDP when there’s a quantitative easing war going on between nations.” Given that most major economic recessions or depressions in history have been caused by a debt bubble, Morgan believes the economy’s stability is at the mercy of unforeseen global events. “If interest rates go up and businesses have to pay back the debt, do they stop investing in growth? And what does that do to our industry? Those are my concerns.”
What Can Companies to do Weather the Uncertainties?
Despite obvious threats and challenges, both Morgan and Reynolds agree now is a time of great opportunity for the plastics industry. “First, we must think of this time as a very exciting and dynamic point of transition,” Morgan said. “Businesses that are quick to think creatively and challenge their existing operating models will find opportunity.” Morgan believes that for every segment facing uncertainties, there is a new one poised to emerge in response. “The processes that made us successful in the past won’t continue to serve us well in the future. We need to change the way we think about business,” Reynolds said. New ways of thinking will create more resilient businesses and processes that catch on and become the new norm.
“We’ll weather this storm because plastics is flexible,” Morgan said. “That’s what plastics has always been, unlike rigid steel.”
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If you enjoyed this article, please check out some previous Fireside Chats:
- Fireside Chat: Plastics, the Circular Economy & Creating a More Sustainable World
- Fireside Chat: There’s No Time Like the Present to Finance Your Plastics Business
- Fireside Chat: How to Attract and Maintain a Diverse Workforce in the Plastics Industry
- Fireside Chat: The Capabilities And Versatility Of Open Platform 3D Printing Technology
- Fireside Chat: Achieving Supply Chain Excellence Amid Rising Trucker Workforce Shortages And Costs