Increased inflation is the latest concern after a string of disruptors to the plastics industry. The Federal Reserve and central banks around the globe are taking action to course-correct, but whether this period of volatility will evolve into a full-blown recession remains to be seen.
In the latest episode of M. Holland’s Plastics Reflections Web Series, host and moderator Dwight Morgan, Executive Vice President of Corporate Development at M. Holland, discussed the state of the global economy with panelists Michael Andersen, Head of Automotive/Industrial Sales at Maersk, and Mike Foldvary, Director, Distribution Sourcing at M. Holland. After presenting an overview of the inflationary situation, the panel covered supply and demand impacts and reshoring initiatives in the plastics industry before sharing business insight for the end of the year. To access the full recording of this webinar, click here.
In early October, the U.S. Consumer Price Index showed an 8.2% increase in prices for goods and services over the last 12 months. The report also put core inflation — the cost of all goods and services excluding food and energy — at 6.6%, the highest in over 40 years.
The current level of inflation is directly related to the unpredictable economic environment over the last decade. “The biggest issue that the Fed is facing is this huge increase in the money supply,” Morgan explained during his economic overview. To ease the impacts of the Great Recession in 2008, the Fed facilitated a period of quantitative easing, or improving returns on short-term investments to increase the money supply and encourage economic recovery. Usually, once the period of volatility has passed, quantitative easing is followed by a period of qualitative tightening to balance the supply of ready money. Unfortunately, this process was interrupted by the ultimate Black Swan event — the COVID-19 pandemic.
Once again, the Fed had to manipulate the economy to prevent a total shutdown. Because these two periods occurred so close together, it increased the money supply, drove demand beyond supply and contributed to the current high inflation rate. “The problem with all the money floating around is that those dollars want to be spent,” Morgan said. The Fed and other central banks worldwide are raising interest rates aggressively to slow the resulting price increases.
The Fed is determined to stop runaway inflation, which it views as a greater long-term danger than a recession. “In a matter of four months, we’ve had the most aggressive rate hikes in recent history,” Morgan explained. “We’re likely to see that continue into at least next year.”
Despite inflation, the U.S. has a remarkably robust economy right now. In September, the U.S. unemployment rate fell to 3.5%, matching its lowest level in 50 years. The number of U.S. job openings has been high, though there are not enough workers to fill available jobs. As long as there is a gap between labor supply and demand, the job market will remain.
Morgan noted that the Fed wants to see a softening of the jobs market before easing its current tight monetary policy. Therefore, we can expect the Fed to continue raising interest rates until the job market weakens. The longer it takes to decline, the higher the risk of a recession. There is some light in the dark, though. It typically takes 12-18 months for a rate hike to manifest in the economy fully, but there is mounting evidence that the earliest of the Fed’s rate hikes are beginning to work. The U.S. ISM Purchasing Managers Index fell to just above 50 in September, an indicator that the economy is starting to slow. Trading Economics also reported a drop in U.S. factory orders in July 2022, indicating a decrease in demand, which should lower prices.
While lowering demand is a positive sign that the Fed’s plan is working, many factors could hasten an upcoming recession. Global interdependence and the digital economy make it more likely that economic downturns will no longer be limited by geography. “Money can flow at lightspeed across borders,” Morgan explained. “That can create volatility.” A new Black Swan event or permanent changes in trade flows and supply chains could exacerbate future recessions on a global scale.
Despite rising inflation and the risk of recession, the plastics industry remains resilient. Recent projections courtesy of Andrew Reynolds, Director at Business Publishing International, show industry growth is likely through the end of the decade in every international market except Europe. We can also expect growth in all resin families with two exceptions: Polystyrene is suffering from significant attrition of demand, while polyethylene terephthalate (PET) is seeing stagnant growth due to sustainability concerns.
The plastics industry is also seeing more stabilized supply. Mike Foldvary noted that buying has been “almost unencumbered” over the last few months, though imports still suffer slightly longer lead times. These increased lead times generally stem from unavoidable port congestion, not supply issues. Overall, the panelists agreed that we’re finally seeing the supply chain recover from the COVID-19 pandemic.
Part of that recovery is the result of new capacity coming online. In the U.S. alone, new investments in polyethylene and polypropylene production will create a potential glut of supply that will fill domestic demand and then some. Foldvary expects an “interesting market” in the next six months as the U.S. works to export any excess product to Asia and Europe.
Capacity is not the only element of the plastics supply chain trending domestically. Stung by material shortages and historic logistics issues during the pandemic, manufacturers are emphasizing supply chain resilience over supply chain efficiency and trying to shrink their supply chains to reduce risk. We’ve seen reshoring across industries as companies attempt to regain control and better visibility over their supply chains.
During the discussion, Foldvary explained that the impacts of the pandemic are still very raw, and he expects the reshoring trend to continue for now. “[M. Holland customers] want to have continuity of supply first and foremost,” he said. “It will be interesting to see if that continues as the market evolves and the dynamics of supply and demand play themselves out.”
Even though supply chain constraints stung many, Michael Andersen was confident that “very commoditized procurement will come back.” He expects permanent change based on the experience, but “there will be a tendency to go back to where [global supply chains] used to be.”
Panelists agreed that during this time of flux, companies must encourage collaboration between their suppliers and logistics partners to find the right blend of value and availability.
Our panelists shared their most pressing concerns for the near future to close the conversation. Lowered demand remains a top concern, especially as it stays low moving into the holiday season. “It used to be supply that kept me up at night, but now it’s demand,” Foldvary said. “How quickly it changes.”
During this period of unusually low demand, high inflation and recession fears, Foldvary advises everyone from customers to suppliers and distributors to “have strong balance sheet management, keep an eye on working capital, tighten operations and keep your ‘why’ in mind at the end of the day.”
Andersen built on that advice, recommending companies create a comprehensive overview of their supply chain to drive resiliency. “We’ve gotten pretty comfortable engineering the supply chain,” he said. “To make that repeatable, we need agility and the ability to evolve with the changing times.”
A collaborative approach to supply chain management is key to success in uncertain situations. Through knowledge sharing, careful planning and agile flexibility, the plastics industry will remain resilient regardless of the direction of the economic winds.