Mohan Raut R.No.

10511

Background Since many consumer goods such as Kitchen utensils, bath tub, tooth brush, tooth paste, car wheel, mineral water bottle, carbonated and noon-carbonated soft drinks, juice bottles, medicines, airplanes, shopping bags and many more are made up of polymer, it has a significant impact on consumers purchasing power. Whenever the price of polymer increases, the cost of production of such articles also increase and eventually, the firms that use goods made up of polymer pass on the incremental cost to the consumers. What is polymer? A polymer is a molecule made from joining together many small molecules called monomers. The word "polymer" can be broken down into "poly" (meaning "many" in Greek) and "mer" (meaning "unit"). A chemical reaction bonding monomers together to make a polymer is called polymerization. Because of the extraordinary properties of polymeric materials, they play an essential and ubiquitous role in everyday life. This role ranges from familiar synthetic plastics and elastomers (a natural or synthetic rubber rubber-like plastic) to natural biopolymers such as nucleic acids and proteins that are essential for life. Natural polymeric materials such as shellac, amber, and natural rubber have been used for centuries. A variety of other natural polymers exist, such as cellulose, which is the main constituent of wood and paper. The list of synthetic polymers includes synthetic rubber, bakelite, neoprene, nylon, PVC, polystyrene, polyethylene, polypropylene, polyacrylonitrile, PVB, silicone, and many more. Polymers are very useful materials because their structures can be altered and tailored to produce materials 1) with a range of mechanical properties 2) in a wide spectrum of colors and 3) with different transparent properties. Types of Polymer There are many types of polymers. Mostly used polymers are as follows: Commodity plastics PE = Polyethylene PS = Polystyrene PP = Polypropylene PVC = Poly(vinyl chloride) PET = Poly(ethylene terephthalate)

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Specialty or Engineering Plastics Teflon (PTFE) = Poly(tetrafluoroethylene) PC = Polycarbonate (Lexan) Polyesters and Polyamides (Nylon) Cost Drivers of Polymers: Petroleum: The major cost driver of polymer is petroleum products. It is by-product of crude oil. Petroleum is often attributed as the "Mother of all Commodities" because of its importance in the manufacture of a wide variety of materials It is refined and separated, most easily by boiling point, into a large number of consumer products, from gasoline and kerosene to asphalt and chemical reagents used to make plastics and pharmaceuticals. Petroleum is used mostly, by volume, for producing fuel oil and petrol, both important "primary energy" sources. 84% by volume of the hydrocarbons present in petroleum is converted into energy-rich fuels (petroleumbased fuels), including petrol, diesel, jet, heating, and other fuel oils and liquefied petroleum gas. The 16% not used for energy production is converted into many other chemical products such as pharmaceuticals, solvents, fertilizers, pesticides, and plastics. Four different types of hydrocarbon molecules appear in crude oil. The relative percentage of each varies from oil to oil, determining the properties of each oil. Composition by weight Hydrocarbon Average Range Paraffins Naphthenes Aromatics Asphaltics 30% 49% 15% 6% 15 to 60% 30 to 60% 3 to 30% remainder

The Price of polymers moves along the crude oil price. The price of crude oil goes up; the price of polymer also goes up. Similarly whenever the price of crude oil falls, the price of polymer also falls. However, the changes in oil price may not immediately affect the polymer price. The effect is shown after some time lag. But polymer takes the same path as takes the oil. Almost all the polymers behave in the same fashion in terms of the price relationship with crude oil. Therefore, the below data consider the relationship with crude oil and assumed to represent all the polymers while maintaining the relationship of price with price of crude oil. Asia PET Polymer Vs Oil prices

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from 1st week of 2008 to 5th week of 2011 (At the interval of every 10 weeks) Source : Coca-cola Cross Enterprises Procurement Group Oil Price (US$ per Barrel) 96.4 104.78 127.18 123.79 91.99 47.1 45.77 37.69 53.5 59.92 71.5 75.91 71.93 82.72 79.21 74.33 84.88 88.78

Date Week 01-08 Week 11-08 Week 21-08 Week 31-08 Week 41-08 Week 51-08 Week 05-09 Week 09-09 Week 19-08 Week 29-09 Week 39-09 Week 49-09 Week 07-10 Week 17-10 Week 27-10 Week 37-10 Week 47-10 Week 05-11

PET Price (US$ /Ton) 1330 1370 1400 1520 1190 830 880 980 1110 1040 1040 1160 1250 1290 1160 1170 1400 1650

Above table and graphs clearly depicts the co-relation between the oil and polymer price. If we see the prices two years before, there is increase by 87.5% in polymer price while the price of crude oil has shouted up by 94%. According to the Economist online dated 14th February, 2011, the price of polypropylene, another versatile polymer has soared by 22% in January and by 133% over last two years. Future forecasted: Coca-cola CEPG (Cross Enterprise Procurement Group) has forecasted the Oil and PET price for 2011 as follows. New Forecast Q1, 2011 Q2, 2011 Q3, 2011 Q4, 2011 Oil $94 $93 $90 $90 Average $91.7

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PET FOB

$1,735

$1,634

$1,543

$1,542

$1,614

As already stated above, the polymer price has strong co-relation with oil price. However, rather than saying polymer price increased due to increase in the crude oil, it is better to say that demand and supply imbalances of crude oil has influenced the polymer price. There are number of factors that contribute to the imbalances of supply and demand of crude oil thereby affecting the price of oil and polymer as below: 1. China, like other commodities, over-consumes the polymer and creates excess demand (China effect). This leads to price increase of polymer. 2. Increasing consumption of goods and rising care ownership in emerging Asia creating supply shortage that again hits the price of polymer 3. International events like New year in China and east Asia also creates surge in the demand once these countries resume after the month long vacation and the demand surpasses the supply. However, this is the short run effects. 4. Political instability in Egypt, East Africa and Middle East has slashed the production/supply of crude oil automatically slashing the polymer because it is byproduct of petroleum. 5. Big terrorist attack on oil producing countries like twin tower attach on September 11 also causes the short supply of crude oil along with polymer. 6. Natural disasters like Tsunami in oil producing countries also affect the supply. 7. Changing technology of producing ethylene (one of the veteran hydrocarbon) using natural gas derivative ethane (which does not produce polymer as its by-product) instead of producing the ethylene by naphtha an oil derivative (which produces propylene as its by-product by which polypropylene a versatile polymer is made). This has cause less supply of polymer leading the price increase. 8. Increasing motorists seeking the fuel efficient car that uses the bio-fuel such as ethanol has caused less production of petroleum thereby leading to less supply. Consequences of rise in the polymer price: Firms using polymer tend to pass the prices increases to their customers. However, in some cases it may not be able to pass the burden to the customers in the short term due to fierce competition. In such cases, the companies will have to swallow the price increase themselves thereby dropping their profitability. Some firms might find the alternative and switchover to other products e.g. paper pack instead of PET bottles. This is praiseworthy. However, many firms may not be able to do so. Ultimately the increase price of polymer will hit the consumer purchasing power making the consumer goods more expensive. Mitigating measures: Following measures may be recommended as a tool to mitigate the impact of sky-rocketing polymer prices at aggregate and firm level. Light-weighting:

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Using the techniques of re-engineering, the articles using the polymers may be light weighted by reasonable quantities e.g. by 10/20 %. It will reduce the cost by reduced weight of polymer. Re-cycling: Re-cycling of used plastic materials will also help in controlling cost. It will add to the raw materials available and thus less pressure on price rise. In addition, it is also believed to save the energy required for processing. Biopolymer: Scientists are already underway to develop alternative way of making polymers. Attention to be given to cost effective alternative. Replacement: Yet another measure may be making the articles using other substances like paper. Tetra and paper pack may used for PET bottles provided such switch over is cost effective. International efficiencies: This is the firm level measure that reduces the cost of production of such materials. Under this measure, the firms use their resources at optimum and increase the productivity. Hedging: Another short run and firm level mitigating approach may be hedging the polymer against price increase. Under this method, the buyer and seller agree to supply the polymer at the agreed price irrespective of global movement. Bibliography Wikipedia encyclopedia The Economist online and print version Coca-cola CEPG publications NDT resource Centre Plasticstoday.com Packtrax.com Custompartnet.com

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