Spiraling polymer prices are causing great concerns to plastics processors as well user and allied industries, and have been the hot topic of discussions over the last few months. Escalating oil prices have been blamed for the rise in feedstock prices, which in turn have led to rising polymer prices, currently lingering at record peak levels. When will the rise in oil prices and subsequently feedstock prices be arrested? When will polymer prices stabilise and at what levels? Will the worldwide economies after a sluggish 2002-2003, face obstacles in the path to recovery? Will polymer demand be affected by high prices? These are few of the questions raised by our readers. In this feature, we attempt to answer many of them thus:

	When did polymer prices start rising?
	Global Oil Scenario
	Factors affecting Polymer prices The basic prices of oil, ethane, propane, gas and naphtha Capacity utilization Demand-supply balance
	When will polymer prices stabilize?

When did polymer prices start rising?

As per industry, rising oil prices lead to a rise in feedstock prices, creating a mothball effect on polymer prices. Hence, oil price hikes should preceed polymer price hikes.
As represented in the following graphs, oil prices remained fairly stable over a long period from January 2003 until April 2004. However, feedstock prices started rising, particularly in Q1-2004; increasing by 10% or more. This increase in polymer prices could be ascribed mainly to overall increase in their demand.
In a reversal of trend, while oil prices rose by 10% in Q2-2004, polymer price hikes did not match the pace and slowed down. Interestingly polymer price increase continued during Q2-2004, albeit somewhat slowly, despite an increase in oil prices by 10% in the same period. Prices of all polymers went up significantly from the beginning of Q3-2004.
Very minimum correlation between the increase in the price of oil, naphtha and other feedstock and the increase in the prices of polymers can be seen in this period.
Let us look at the increase in the prices of oil, feedstocks and polymers and ascertain whether an increase in oil prices has resulted in the increase in prices of the basic feedstocks or is booming demand leading to an increase in polymer prices?

Movement of Oil, Naphtha, EDC, VCM, Ethylene, Propylene from Jan 03-Oct 04

Movement of Oil, Naphtha, Ethylene, Propylene, Polyethylenes from Jan 03-Oct 04

Movement of Oil, Naphtha, Propylene, Ethylene, Polypropylene from Jan 03-Oct 04

Movement of Oil, Naphtha, Ethylene, Styrene, Polystyrene from Jan 03-Oct 04

Global Oil Scenario

Oil prices remained stable around US$32/barrel in early 2004, but shot up beyond US$45/barrel around mid August and peaked at approx US$50 end of September. Interestingly the gap between Middle East price and Brent has widened to almost US$ 8-10/barrel indicating speculative trading. (While Brent price is at US$50/barrel, Dubai price is only around US$41/barrel). The flaring of oil price despite an increase in the oil production by OPEC countries seems unjustified. However, the global demand of oil, and that too from Asia and USA has increased significantly. China alone has imported 40% more oil this year so far. If the increase in the oil price continues for a longer period, it could fuel inflation in 2005, adversely impacting economy all around. However, IMF and World Bank still opine that oil prices would remain on the higher side, yet would not dampen the overall demand. The turbulence in oil prices during the last 3 months has been caused by some of the following factors:

	Increase in energy demand
	Disruption in supply from Iraq, Nigeria, Russia and Venezuela
	Limited possibility of an increased supply from the OPEC region

To read in detail, click here : Why are oil prices rising?

Polymer prices depend upon

	The basic prices of oil, ethane, propane, gas and naphtha.
	Capacity utilization
	Demand-supply balance

The basic prices of oil, ethane, propane, gas and naphtha :

Global feedstock share for Ethylene production is Naphtha (53%), Ethane (30%) and other feedstocks like propane, butane, gas oil (17%). In the Asia Pacific region almost 80% of the Ethylene capacity is based on Naphtha; whereas, in the Middle East almost 70% ethylene capacity is based on Ethane. The cost of producing ethylene from ethane in the USA is 3-4 times more than in the Middle East, but the difference in the cost between the 2 regions for producing ethylene from naphtha is hardly around 25%.
The petrochem plants depending on ethane, propane, gas and naphtha as feedstock and subsequently ethylene and propylene face obstacles in the form of a supply crunch as well as prevalent high prices. However, very minimum correlation between the increase in the price of oil, naphtha and other feedstock and the increase in the prices of polymers can be seen in this period. Maximum price increase is seen in Polystyrene and the least in PVC, possibly since Polystyrene has to depend upon Ethylene and Benzene - both derived from oil, while PVC depends only partly for feedstock inputs from oil.

Capacity utilization

The petrochemicals cycle peaks every 7 years. This is largely due to the fact that as product prices increase, the manufacturers go ahead with capacity addition. Once the capacity becomes operational and supply outstrips demand, producers feel the pressure on margins as competition does not allow increase in prices. As a result, prices decline and this continues until there is further recovery in economic performance. However, at the time of this petrochem peak, there has been no such significant capacity expansion resulting in a tight supply situation. The pressure of growing demand has aided in increasing capacity utilization of polymer plants during the last couple of years, expected to come down only when more capacity will start going onstream towards end of 2005. Almost 13 million tons of only Polyethylene capacity is expected to be installed and on stream globally between 2005 and 2008, of which over 70% will be in the Middle East and Asia-Pacific region.

Demand Supply Balance

Meanwhile, global economies are recovering all over, showing signs of a positive change since the last two quarters of 2003. To read GDP growth forecasts amid soaring oil prices click here
Growing economies will definitely exert pressures on the overall demand for polymers, directly or indirectly since plastics are the major input/raw material for major growth drivers of the economy: sectors such as housing and construction, FMCG, packaging, automotive, etc. As for the domestic markets, infrastructure projects such as telecom, road development and construction coupled with government policies favouring agriculture and rural construction has buoyed the markets for petrochemicals. The demand for polymers has seen an increase of about 4% in 2003. The global economy seems to be heating up, putting pressure on polymer demand. However, supply side will gear up only in 2006, leading to a situation of demand-supply imbalance expected to ease only when more capacity will go on stream. Estimates of demand-supply indicate that pressures on supply may ease after 2006.

When will polymer prices stabilize?

The impact of higher capacity will only be felt after 2006. Until then polymer prices are expected to remain higher because the overall demand of polymers is expected to be higher on account of an overall improved economy. The global economy is expected to show a healthy growth of about 4-5% in 2004 and most likely in 2005. The fear of terrorism is likely to be seized after the US Presidential election. Oil supply is expected to be more stable in 2005. It would therefore not be surprising if oil prices get stabilized at lower range of US$35-40/barrel. This will eventually have a positive impact on the prices of polymers. Further, in the global scenario, factors such as rising interest rates and slowing down in the Chinese demand could possibly affect the uptrend.

Most pundits believe that the polymer prices will reduce at least by 15% from the existing level by early 2005. Polymer demand will be buoyant at least until 2006 when newer capacity will be commissioned. The plastic processors need not panic due to higher prices of raw material because the future holds bright for them at least until 2006.