Ill wind blows good for blow molders.

There's an old saying: It's an ill wind that blows nobody good. Despite all the suffering wrought by Hurricane Katrina on the Gulf Coast, blow molders will probably reap some benefits. This is one factor in the turnaround expected for blow molding business in late 2005 and 2006.

After expanding a robust 6% in 2004, our Blow Molding Business Index for the year to date is down more than 3%. But we expect the downtrend to be reversed in the second half of this year, and a steady uptrend will be established in 2006. Our forecast calls for a flat year overall for blow molding in 2005 and a gain of 5% in production of blow molded products in 2006.

Because of the unusual market conditions of the past two years, it is likely that both the gain in the Blow Molding Index in '04 and the decline so far in '05 are overstated. In 2004, resin prices were rising steadily, so there was a strong incentive for processors to pre-buy material ahead of future price increases. The Blow Molding Business Index is based heavily on materials consumption, so any resins purchased before they were actually needed would have pushed the Index artificially higher.

Early in 2005, prices of resins started to decline. The incentive then for processors was to pare down their resin inventories and purchase only enough for their immediate needs because future production needs could be met with cheaper resins. This would have pushed the Blow Molding Index down, even though production was actually holding steady, as was market demand.

The Katrina effect

As the third quarter of this year progressed, the price of resins started to head upward again. And then came Hurricane Katrina. At the time of this writing it is still too early to determine what long- or even medium-term effects this natural disaster will have on the resin market. However, the most likely short-term effect is that it will help prop up resin prices.

On the other hand, some blow molders will benefit from the post-hurricane recovery. Virtually all of the liquids and much of the food and cleaning supplies consumed by hurricane victims and relief workers will need to be packaged and shipped in blow molded containers. And as the clean-up efforts progress, demand for food, household chemicals, and pharmaceuticals will remain at a premium and local inventories will need to be completely re-stocked. Thus the net effect of the hurricane for the blow molding sector and the overall economy will be positive.

For the parts of the country and economy not linked to hurricane recovery, the outlook through the end of 2006 is for steady growth. Total retail sales minus autos, a good indicator of the demand for packaging products such as bottles, will expand by a hearty 7% in 2005 and another 6% in 2006. This growth will be fueled by a gradual rise in overall U.S. employment and income levels and also by a gradual decline in the cost of petroleum products such as gasoline and heating fuels. Sales at food and beverage stores will expand by at least 4% in both 2005 mad 2006. Restaurants and drinking places will enjoy annual gains of close to 7% while sales at health and drug stores will expand by an average of 6%.

The largest blow molding markets are bottles for liquid food and household chemicals. These segments are also less volatile than the others, so it is not surprising that total demand for these products is little changed so far this year despite the high cost of resins. After a flat year in 2005, we forecast an increase of 3% in 2006.

The biggest declines this year were in output of bottles for cosmetics and toiletries, as well as industrial drums and large containers. Both of these categories will finish 2005 down at least 5%, but they will return to positive growth in 2006. The fastest growing segment in recent years has been blow molded fuel tanks, but growth in this segment has decelerated this year. Total output of fuel tanks will hold steady in 2005, but increasing demand for lighter, more fuel-efficient vehicles will expand the market by at least 10% to 15% in 2006 and beyond.

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Bill Wood, an independent economist specializing in the plastics industry, heads his own firm, Mountaintop Economies & Research, Inc. in Greenfield, Mass. He may De contacted by e-mail: [e-mail].

Bill Wood

Plastics Market Economist