Plastics Market

An Expert's View about Chemicals in Canada

Posted on: 24 Oct 2011

Summary
The U.S. and Canadian plastics markets are deeply intertwined and inherently interdependent. As Canada’s Trade Minister recently noted, the bulk of Canadian exports are actually inputs into U.S. production chains, and such is the case with plastics. In 2009, both Canada and the United States imported up to $10 billion in plastics from each other. Canada is the second largest export market for U.S. plastics.

In 2009, trade in plastics with the United States accounted for 92 percent of exports and 72 percent of imports for Canada. Nine of the ten largest plastics and chemical companies in the world (e.g., BASF, Dow Chemical, DuPont, ExxonMobile, Mitsubishi Chemical, and Shell) have production or research and development facilities in Canada. Within Canada, Ontario plays a key role in plastics manufacturing.

According to USDOC, Ontario is now the third largest plastics-producing region in North America. Toronto -- the largest city in Ontario (and Canada) and the fourth largest in North America -- is home to the corporate headquarters for industry leaders such as BASF Canada, DuPont Canada, Husky Injection Moulding Systems, Mold-Masters, ABC Group, Woodbridge Group, and StackTech Systems. Seventyseven percent of machinery firms, 71 percent of mold makers, and 50 percent of plastic processors are located in Ontario, while roughly 45 percent of Canada’s resin shipments come from Ontario. In most plastics markets in Canada, demand has weakened considerably in the past few years. The decline has stemmed from a weaker demand in some markets (such as auto manufacturing), the general economic global recession of the past two years, and environmental concerns.

Canadian firms that are well versed in export opportunities have an advantage in some areas -- such as mold making and plastics machinery, solid customer relationships, and proximity to natural resources. Their U.S. counterparts, on the other hand, have other distinct advantages on which they can capitalize. U.S. manufacturers’ strengths lie in economies of scale, technological know-how and in-house R&D programs, a skilled workforce, higher productivity in some areas, and often a lower cost of production. New opportunities in the markets for plastics will be “linked to” mass customization, sustainability, highvalue- added products, and hybrid materials. U.S. firms may also find opportunities to forge alliances with smaller Canadian competitors. 

Background
Growth in the Canadian plastics industry was fuelled by a dramatic increase in domestic capacity for producing synthetic resins -- a necessary input for plastics. This growth occurred in response to the first oil crisis in the 1970s, when multinational enterprises employed efforts to secure Western Canadian oil and gas sources. During that period, tariffs into the United States for resins were typically ten to twelve percent, compared with rates of three to five percent for plastic products. Once multinational enterprises built world-scale resin capacity in Canada, they had an incentive to expand the Canadian customer base as a means for selling domestically as much resin as possible in order to avoid export tariffs.

Multinational resin companies also became integrated downstream into plastics processors as a means to indirectly export their resin in the form of plastics products and thus receive better tariff treatment. While the tariff structure has significantly changed since NAFTA was implemented, the investment into the infrastructure had already been made and structural changes became more difficult.

Characteristics of Market Segments
The overall size of the Canadian market for plastics ranges from $25 to $51 billion. The plastics industry is composed of both upstream and downstream firms. Although the sector often is referred generally as “plastics,” it includes three distinct segments: plastics processing, machinery and molds, and synthetic resins.

Plastic Processing: Plastics are used by virtually every end-use segment of the economy. Certain attributes of plastics, such as weight and corrosion resistance, have led to the creation of new products and to the displacement of paper, glass, and metal from traditional applications. Plastics processing -- the manufacturing of plastic products or components -- is the largest segment and accounts for about 50 percent of the overall market. The plastics processing segment is broken down further as follows: transportation equipment, building materials, and packaging, with each sub-segment roughly equal in size.

The GOC estimates that Canadian manufacturers produce about two percent of the total world volume of plastic products. In 2009, about 2,490 establishments in Canada processed synthetic resins into plastic products, generating shipments valued at $16.0 billion and employing 75,000 people. The plastics processing segment is characterized by a large number of small-and-medium-sized firms, almost all of which are Canadian-owned, as well as a few large firms, an estimated 60 percent of which are Canadianowned. Overall, the GOC estimates that this segment is 95 percent Canadian-owned.

Growth in plastics has slowed in recent years. As the current global recession became acute, the demand for many products associated with plastics has weakened. Some markets (e.g., automotive, building and construction, and marine products) suffered deep demand erosion as a result of the recession. Based on a study conducted by the industry group Canadian Plastics Industry Association (CPIA), projections show that the markets will not regain the 2004 volume of output until at least 2014. In the transportation sub-segment, the industry has seen a consistent decline since 2004, and has shrunk by more than 30 percent from its peak. The building materials segment has also declined, but the decline has been more recent and less severe, declining by 20 percent in 2009, but could recover up to eight percent this year. With packaging, the market has been weaker in the last several years due to environmental concerns; however, the rapid adoption of bio-resins has substantially stemmed the decline in this sub-segment. Packaging is unique insofar as it is relatively recession-resistant. However, recent trends suggest that a U.S. packaging firm would need a bio-resin rich portfolio to be competitive in Canada.

Plastic Machinery and Molds: Special machinery and molds are required to produce plastic products. Manufacturers of molds customize a mold for the plastic product to be produced. In some cases, the mold is proprietary to the plastics processor, while in other cases the mold is owned by the final customer, and it is provided to the plastics processor under a contractual arrangement to make parts on a custommolding basis. Factors that determine the competitiveness in the machinery and mold segment include: a demonstrated capability to design and build high-quality equipment; access to modern production facilities; the use of advanced manufacturing technologies; a skilled work force;, price; a strong commitment to customer service; and delivery time.

Based on GOC data, the mold segment consists of more than 500 firms, with 7,200 employees and shipments of $1.2 billion. Canadian mold making firms tend to be small to medium-sized with a few relatively large firms in the mix. In 2008, according to the GOC, six of the top ten North American mold manufacturers were Canadian, with Husky Injection Molding Systems, Wentworth Technologies, and Omega Tool ranking in the top three. Canada was the sixth largest exporter of molds in 2007. Plastics machinery is required to make molds. Such machinery employs a variety of different processing technologies, including injection molding, extrusion, blow molding, thermoforming, and rotational molding. While each product requires a specialized mold, the same machine can be used to produce a variety of plastic products by changing the mold.

The GOC reports that in 2008 the machinery subsector consisted of 94 establishments employed 4,600 people and generated shipments of $920 million. The vast majority of the machinery is customengineered, with particular emphasis on quality, performance, and customer service. Canadian manufacturers of machinery are typically small-and-medium-sized companies and have become highly specialized in order to compete in domestic and international markets. Canadian machinery manufacturers have gained an international reputation in the production of high-quality injection molding, thermoforming machinery, blown film extrusion systems, and extruders for corrugated pipe and other plastic products.

Canada relies on exporting a majority of its plastics machinery and molds. In 2008, 98 percent of plastics machinery produced in Canada, worth $900 million CAD, were exported. Of those, 54 percent went to the United States. That same year, imports of plastics machinery were $478 million, with 51 percent of imports coming from the United States. In 2008, mold exports totaled $833 million, which represented 67 percent of all molds produced in Canada, 77 percent of which were shipped to the United States. Imports in 2008 were $390 million, 50 percent of which came from the United States. As a result, Canada has a favorable balance of trade in machinery and molds.

Many expect weak demand to continue for the near future. In the period between 1990 and 1999, growth in both segments was driven by the rapid development of new plastics applications and through substitution for other materials, particularly in the packaging, construction and automotive industries. As a result of weak demand in plastics processing, output for machinery and molds in the current year is also expected to be adversely affected.

Synthetic Resins: The synthetic resin industry converts petrochemicals like ethylene, vinyl chloride, propylene and styrene into resins. Synthetic resins are the most significant input in plastics processing, accounting for 30 to 50 percent of the final value of a plastic product. The quality and cost of resins vary significantly. Commodity resins are produced in high volumes and command a relatively low price per unit volume. In contrast, engineering or specialty resins, which offer higher performance and other advantages -- such as heat resistance, flame retardancy, and mechanical strength --, command a much higher unit price.

In Canada, many resin-producing firms are owned by U.S. and European multinational firms. Major U.S. suppliers with facilities in Canada include: Alpha/Owens Corning (Ontario), Dow Chemical (Alberta and Saskatchewan), Hexion Specialty Chemical (Alberta, Quebec, Ontario), Imperial Oil (Ontario), Nylene (Ontario), and Oxy Vinyls (Ontario). Major Canadian suppliers are limited to Nova Chemicals (Alberta and Ontario) and Arclin (Ontario, British Columbia, and Quebec).

Current capacity affects the type of resin made by suppliers. Unlike plants in Alberta, which produce commodity-grade resins from natural gas, plants in Ontario and Quebec produce resins using raw materials derived from both crude oil and natural gas. Engineering resins are produced in much smaller quantities in Canada relative to its U.S. competitors. Even before NAFTA existed, when Canadian buyers were forced to pay high tariffs on U.S. engineering resins, the domestic market in Canada was insufficient to make the economics attractive enough to manufacture them domestically.
 

Read the full market research report


Posted: 24 October 2011

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