Plastic pipe production benefits from demand within Germany

The German plastic pipe industry has recovered very quickly from the 2008/2009 crisis in the financial market – a crisis that had also caused a temporary decline of production in this industry.

After an increase in production volumes in 2010, the figures for 2011 are clearly set to show a further increase. Although no precise details are available for the entire year, this appears to be the conclusion from information provided by associations and companies.

One fairly precise indicator of economic developments that seems to have established itself is the KRV Business Climate Index which is published at quarterly intervals by the German plastic pipes association Kunststoffrohrverband in Bonn. During the first quarter of 2011, this otherwise positive development was only sullied by the tense situation in manufacturing costs. While the profit situation of companies was clearly impacted by ongoing increases in raw material prices and by rising costs of energy, transport and labour, it was difficult to pass on to customers any rises in manufacturing costs. This was due to overcapacities and intense competition.

Nevertheless, the Business Climate Index was within a positive range for the fourth time in succession. The business situation during the first quarter benefited from better weather conditions than in the previous year and from a clear improvement in the economic situation and business activities. This was particularly true for the areas of gas, drinking water and waste disposal as well as in industry. Further elements that kept this business expectation index at a high level were a range of upcoming project activities, rising demand and a noticeable economic recovery.

During the second quarter the Business Climate Index for Plastic Pipes continued to exceed the level of the previous year in all areas. Compared with the first quarter, however, there were also some slight indications of a slowdown and therefore of a decline in market dynamics. Moreover, margins continued to be tight, although raw material manufacturers that contributed to the Business Climate Index did experience a slight improvement in profits over the previous year’s level, despite a clear increase in manufacturing costs.

During the third quarter of 2011 the Business Climate Index went down again, for the second time in succession, but narrowly remained within the positive range. The negative factors quoted by KRV were a decline in pipe laying activities, lower sales and increasing competitive pressure and price pressure among plastic pipe manufacturers. As a result, the business situation fell short of expectations, especially in building services. At the end of the year the only area where pipe manufacturers still had positive business expectations was the industrial sector.

The positive trend at the beginning of the year was confirmed by production volumes in the first three months of 2011. During the first quarter of 2011 manufacturers were in a position to increase their production. This was mainly due to an upward trend in the construction industry, one of the main buyers of the German plastic pipe industry.

According to KRV, the production of plastic pipe systems rose to 180,350 metric tonnes and thus by 26.5 per cent compared with the same quarter in the previous year. Increases were recorded in all material types and were most noticeable in PVC U pipe system (up 39.5 per cent). High growth rates were also observed in PP (up 29.7 per cent) and GRP pipe systems (up 28.7 per cent), while PE pipe applications, rose by a “mere” 15.8 per cent.

A clear improvement in capital spendings among the main customer industries and thus sales increases were also reported by the Simona Group in Kirn (www.simona.de). During the first half of 2011 business with PP pipes and fittings for industrial applications grew significantly, while sales in PE pipes went down. During the third quarter of 2011, the company recorded a slowdown in growth. One major reason why investment activities were so muted in key customer industries was the financial crisis among banks and governments and the increasing uncertainty it caused in the markets from mid-2011 onwards. Nevertheless, in pipe construction, revenues from PE fittings displayed a clear upward trend, while continuing to decline in PE pipes.

In its 2011 annual report the German Association of the Plastic Pipe Industry (Fachverband der Kunststoffrohr-Industrie) provided a range of figures and analysis of the 2010 fiscal year. In this report it says that German plastic pipe production had risen to 637,000 metric tonnes in 2010, which was 4.9 per cent higher than the year before. However, it still fell short of the record figure of 710,000 tonnes in 2007 and also of the figures in 2006 and 2008. The biggest single segment remained the processing of PE pipe systems, which recorded a 4.0 per cent increase to about 319,000 tonnes. PVC U applications grew to 233,518 tonnes – up 3.5 per cent. The biggest relative increase was observed in pipe applications for PP where the production volume went up 12.7 per cent, reaching 84,193 tonnes.

Growth in production was almost entirely due to the good economic development of the German domestic market, which compensated for sudden economic setbacks in neighbouring EU countries that were burdened by the debt crisis. With 534,000 tonnes of plastic pipe systems, the German domestic market for such systems had reached its pre-crisis level of 2008. Exports, on the other hand, were only 151,000 tonnes and thus merely at the previous year’s level and clearly below the level of 2008. In fact, the export share had dropped from almost 28 per cent in 2007 and 2008 to less than 24 per cent in 2010.

The Association ascribes this generally positive development partly to the economic recovery packages of the German government and partly to substitution effects. It reckons that plastic pipe systems should increasingly replace pipe systems made from other materials, especially in the ailing sector of civil engineering. Moreover, traditional pipe systems are also being replaced more and more by plastic in building construction and therefore in building services engineering. But the upward trend in the German domestic market also appears to have benefited plastic pipe manufacturers outside Germany. At about 49,000 tonnes, imports in 2010 were up slightly compared with the year before, thus reaching the highest level since 2007.

Apart from substitution effects, KRV also sees a stimulation of demand coming from a boost in housing construction. For the second time in succession there was an increase in the number of planning permits for residential housing (up 7.1 per cent in 2010), which undoubtedly benefited plastic pipe systems, as such systems are used in all areas of building services engineering (drinking water and domestic gas installations, drain pipes, underfloor heating and cooling).

The revenue situation, however, was not as positive as the development in sales volumes. In 2010 margins for plastic pipe manufacturers largely stayed at a low level due to rising raw material prices. In early 2011 the situation was made worse by rising energy prices, transport costs and collectively agreed wages. As well as being impacted by cost increases, the profit situation was affected negatively by overcapacities and intense competition. Within a year, for instance, material prices in the plastic pipe industry rose 10.1 per cent for PE and 7.7 for PVC, while costs in road haulage increased by 4.6 per cent and the producer price index for electric power for special tariff customers rose by 5.3 per cent.

Products of the plastic pipe industry are used in many fields of application. In addition to the main areas – i.e. utilities (gas and drinking water), waste disposal (waste water, sewage and rainwater), facility management (drinking water, heating, air conditioning and gas) and industrial plant engineering – there are further applications in agriculture, district heat, environmental protection and cable conduits. According to KRV, plastic pipe systems are likely to have further expanded their market position in all fields of application. At the same time plastic pipe systems are continually entering new markets.

The Association lists the expansion of information and telecommunication networks, renewable energies and also the innovation potential arising from the ongoing development of materials, of production techniques and of production engineering for plastic pipe systems. This allows the development of user-focused solutions and product innovations.

In all, KRV believes that the industry is in a good position. It says that plastic pipe manufacturers are differentiating themselves through a steady stream of new products and systems, based on the commodities that are occupying their production capacities. One particular challenge is seen by manufacturers in making products that will bridge the gap between standardisation and interchangeability, on the one hand, and customisation, on the other. The Association sees a new trend towards manufacturers’ brands and systems in all fields of application. Plastic pipe system are apparently assuming a pioneering role in domestic drinking water installations and in facility management.

The positive development of production volumes during the last decade, according to KRV, shows that plastic pipe systems are heading for long-term growth. Manufacturers believe that their material is in a good competitive position. The further development of plastics is expected to pave the way for innovative plastic pipe systems that will replace steel pipes at higher stress levels and nominal widths, thus creating a wider market. In the important segment of the drinking water supply, the industry is placing its hope in the technical and economic benefits of plastic pipes. This includes their relatively more cost-effective installation and redevelopment processes which are set to make life difficult for any competing systems.