One of the most critical issues facing the Plastics Processors is the sharply spiraling prices of commodity Polymers. The side effects of this price spiral on the Plastics Processing sector may turn out to be very severe, in terms of industrial sickness, demand-recession and dwindling employment. The gravity of this situation can be understood better when you consider that the Plastics Processing industry is in a very unenviable position: between the very large somewhat monopolistic raw material producers on one side and on the other side, by consumers who now have a wide range of choices for industrial products, durable and household goods.

Historically, plastics processed products have suffered from a combination of customs duties, excise duties and sales tax levies alongwith other Policy restraints, that have served to retard the growth of Plastics applications by creating artificial barriers and preventing its wider use in those applications which are of vital use to Nation building.

During the past 15 months there has been a significant increase in the prices of domestic polymers. The increase, depending on the polymer, varies from a high of 91% to 43%. The international prices have also increased significantly more or less in the same proportion as domestic prices. OPP and the other Associations have made representations to the Ministry of Finance for reduction in import duty on Polymers from 20% to 10% of CIF.
Naturally, this is cause for worry and concern particularly when nobody is willing to predict at what level the price escalation will stabilize and when. In a complex situation such as the one that we are faced with, each business unit will need to make its own decisions, and prepare for the future, based on an on-going review of facts as they emerge over time. I have tried to make a beginning by providing some basic facts as I have read or known them and by making sense of the opinions expressed by knowledgeable Friends in the Industry. The facts as stated are by no means complete, and their validity is open for review.

OIL & GAS:

To understand the price situation on Polymers, I believe it is necessary to have atleast an elementary perspective on crude oil, naphtha and gas. The National Geographic Magazine's June 2004 edition reviews the current status of crude oil production world-wide, and concludes that "the days of cheap oil are over"; that world production will most likely peak about 2016, but outside the Middle East even earlier around 2006. The timing, it says rests largely on the behaviour of the Middle East producers; also on moves to find new reserves, and to develop unconventional sources, such as Canada's tar sands.

It is clear from various reports that three factors have contributed to the current price levels of crude, (which are today at twice the levels prevailing in Dec. 2001):

	Increasing global energy demand, including from China. - Crude oil consumption rose by 1.5 million b.p.d., and will grow further by 2.4 million b.p.d. to a level of 80 million b.p.d. in 2004.
	Disruptions in supply; from Venezuela, Nigeria, Iraq and the bankruptcy problem of Russian major "Yukos", the largest Russian oil producer. (Russia is next only to Saudi Arabia in oil production).
	The terrorist threat of disruption in supplies in the Middle East.

Some analysts believe that there is currently very little spare capacity with OPEC; some others state that OPEC producers are not making efforts to look for additional reserves, which geologists believe are present. When supplies outside the Middle East start to dwindle in about 20 years, the Middle East will again be a predominant supplier of one-half to two-third's of the world requirement - the same percentage as before the 1973 oil embargo.

India produces about 33 million MT of crude oil annually, against a requirement of 115 million MT. The Country's annual import bill is around US $ 20 billion (Rs.93,500 crore). Naphtha, a fraction derived from crude oil refining, is the starting point for producing the "building blocks", (ethylene, propylene etc.) for polymers. India is a net exporter of naphtha. Consistent with the increase in crude oil prices, the international prices for Naphtha have increased from US $ 222 per tonne in May 2003, to US $ 420 per tonne to date, an increase of 90%.
To understand the basic differences in production costs in Asia-Pacific, Middle East and Europe/USA the following facts are relevant :
"Majority of the Ethylene crackers are based on Naphtha feedstock. Global feedstock share for Ethylene production was : Naphtha 54%, Ethane 29% and other feedstocks like propane, butane, gas oil 17%. In the Asia Pacific region, 83% of the Ethylene capacity is Naphtha based; however, in the Middle East 69% Ethylene capacity is based on Ethane. In India, 60% of the petrochemical plant capacity uses naphtha as the feedstock and the remaining 40% are gas based. In India, while the cost of Ethylene from gas based crackers is relatively low, India does not have adequate availability of gas. The recent finds of gas in the Krishna-Godavari basin will nearly double the availability. The relative yield of Ethylene is 78% and 32% in Ethane based and Naphtha based crackers respectively. However, yield of bye-products (Propylene, Butadiene, Benzene, Toulene, MixC4, etc.) is more in Naphtha crackers." The cost of ethane and therefore ethylene in the Middle East is around 25% to 30% of that in the U.S.A. Whereas the variations in the cost of ethylene from Naphtha crackers around the World is not so wide --- in the range of 25%