State of the Plastics Industry: Mostly Sunny with a Chance of Thunderstorms

by Laurie Harbour, president and CEO, Harbour Results, Inc.

In 2020, if processors asked, “What would the state of the plastics industry be in 2021?” the sentiment would have been pessimistic. Many predicted the COVID-19-spurred recession to last 12 to 18 months and shutdowns and drop in consumer spending would result in many distressed businesses and industries. Business leaders were focused on addressing employee safety, managing dips in demand, plant closures and labor gaps while trying to manage through an unprecedented situation. It would have been safe to say, not all plastic processors would weather the storm.

However, what actually happened to the plastics industry was somewhat unexpected.

Let’s Take a Look at 2020

To understand what the future holds, results from 2020 should be reviewed. The COVID-19 pandemic had a significant impact on the U.S. economy and nearly every industry, including plastics processors. Despite the unprecedented circumstances and uncertainty that loomed over businesses and consumers alike, the negative impact of the pandemic on plastics processors was less severe than anticipated.

According to the 2021 MAPP Plastics Benchmarking Study powered by Harbour Results, Inc., which included nearly 100 North American plastics processors representing 140 facilities, on average in 2020 the industry reported positive EBIT, improved efficiency, customer gains, continued capital investment and overall healthy balance sheets.

In 2020, among study respondents, average EBIT was positive (3.5%), however everyone did not fare as well. More than 25% of respondents – primary smaller processors making less than $15 million – reported negative EBIT. The Paycheck Protection Program (PPP), received by 75% of plastics processors, did help prop up profitability for many in the industry.

Additionally, processors were able to improve their efficiency rates by $10,000 to $96,000 in value-add per full-time equivalent (FTE) in 2020, up from $86,000 in 2019. Last year, many shops managed to reduce scrap, manage complexity, effectively manage changeover and retain experienced employees to reduce turnover while training new employees. All this helped overall efficiency.

2021 Delivered Opportunities and Challenges

Fast forward to today, and regardless of what the economic and industry experts predicted or forecasted, after a very difficult 2020, the plastics industry rebounded quickly. An unintended consequence of COVID-19 is that consumers changed spending patterns. They stopped spending money on parties, vacations and sporting events to significantly increase spending on durable goods. After a sharp decline in durable goods demand in 2020, the US has seen a 32% growth in durable good demand. In fact, nearly all industries – automotive, medical device, appliance and powersports – are predicted to see between 9 to 12% year-over-year growth from 2021 to 2025.

The demand is positive for the plastics industry. However, this growth has been difficult to manage – chaos seems to be the best word to describe what many shops are experiencing. Numerous headwinds, including supply chain shortages; increased cost of business – corporate tax rate, minimum wage and raw material prices; uncertainty with tariffs; and talent shortages have created a whole different set of challenges for the plastic processors. In fact, according to plastics processors, the top three concerns are access to labor, raw material pricing and prolonged raw material availability.

Access to labor has been a top concern among molders for numerous years, and COVID-19 has created a greater strain on business. In 2020, many people left the workforce or decided to change careers for numerous reasons, leaving manufacturers struggling to fill open positions to meet the growing demand. The unemployment rate in manufacturing is 3.6%, which is significantly lower than the overall unemployment rate of 5.2%. This has created a hyper-competitive labor market that is resulting in many unfilled positions among plastic processors – on average, shops have at least 7% open positions each month.

As for beyond 2021, labor will continue to be a challenge for plastics processors. The $15 minimum wage debate and other wage pressures are creating uncertainty and stress regarding overall labor availability and cost dynamics. This, coupled with the increased labor competition from other industries, is creating a long-term challenge that will require shop leadership to create a strategic plan to close the talent gap.

In addition, the ongoing resin shortages and rising material costs are a significant threat to processors’ profitability and efficiency. The industry saw a dip in capacity utilization from 60% in Q1 2021 to 50% in Q2 2021 due to supply chain complications and lack of resin. Additionally, more than two-thirds of shops are experiencing lead times that are five or more weeks longer than pre-pandemic levels.

There doesn’t seem to be a consensus as to when the resin shortage will end, but one thing is clear – it will not be anytime soon. Some analysts predict price dropping and supply improving by March of 2022, while others don’t see normalization happening until 2023.

Despite the headwinds, plastics processors remain optimistic. The industry expects to recover any losses from 2020 and early 2021 and improve capacity utilization to nearly 68% before the end of the year. Additionally, as a whole, the industry maintained its capital expenditures throughout the pandemic and expects to slightly increase spending going forward into 2021 through 2023.

What Does the Future Hold?

The plastic industry has endured the ultimate stress test, and while many successfully emerged, there are still challenges ahead. The truth is chaos will likely be the norm in the manufacturing industry regardless of the process or the industry. There isn’t another pandemic is on the horizon, but there will be future issues that the industry will need to face. In the near- and mid-term the plastics industry will experience highs and lows that will impact business.

To manage the chaos the best-in-class processors will need to have a clear strategic plan and understand what their company does well. Shops need to be able to quickly react to marketplace increases or decreases, so flexibility is the key. And, labor challenges will remain, so leadership needs to work with human resources to develop a talent strategy and get creative to compete for the next-generation workforce.

This, coupled with leveraging automation and driving efficiency, will drive success. The past 18 months have revealed that business leaders need to focus on the items that they can control and drive accountability throughout the organization. n

Laurie Harbour is president and CEO of Harbour Results, Inc. (HRI), a leading business and operational consulting firm for the manufacturing industry.  Focused on small- to medium-sized manufacturers, HRI offers operational and strategic advisory expertise, as well as proprietary assessment programs to help optimize a business’s performance.

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