The record price of crude oil is adversely affecting the fortunes of several plastic manufacturing firms in the UAE and the GCC region as their raw material costs go up to unprecedented levels, pushing down their margins.
Manufacturers of various plastic products – packaging materials for food and beverages, plastic pipes and fittings, plastic bags, footwear, furniture, household plastic items, luggage and other plastic items – use various forms of polymer and polythene resin, which are direct byproducts of the petroleum industry.
The Middle East is known to be the world's largest producer and exporter of petrochemicals and plastics and the region has been adding massive capacities, driven by low cost feedstock availability and inherent economies of scale.
Vinod Madhusudhan, Group Marketing Manager, Harwal Group, which runs two leading plastic manufacturing firms in the UAE – Interplast and Cosmoplast – said: "The price of plastic and polythene are directly linked to crude oil prices. As the crude price touched $135 a barrel last week, our raw material cost shot up drastically. We have been in the market for 30 years and the raw material cost has never reached this level."
Cosmplast converts 120,000 tonnes of raw material per annum into finished goods – plastic pipes, household items, luggage, packaging materials and a wide range of plastic goods.
The UAE has about 2,000 plastic and rubber companies in operation.
Madhusudhan said the oil price is the major factor affecting the plastic industry and the UAE plastic industry is at the cusp of another price increase. "We maintain good relationships with our suppliers, such as Sabic of Saudi Arabia, and our huge conversion capacity is an advantage. We anticipate the high oil price will be contained. Otherwise, the plastic industry will face a crisis."
Salim Patni, Sales Manager, Al Anaj Plastics, Ajman, said plastic prices have gone up by more than 60 per cent in the past year and a half, on the back of the almost daily increase in crude prices. Major suppliers of polythene are revising their rate every month. He said: "Our regular suppliers revise their price every month. For the May 2008 shipment we got plastic for $1,635 (Dh6,000) per metric tonne and next month it will go up to $1,700 per metric tonne.
"Every month we convert about 50 tonnes of plastics into various finished products and our customers cannot accept a 25 per cent price increase. Our profit margins have come down and because of customer resistance we can increase prices only gradually. As there is increased competition we could not increase our price more than 30 per cent.
He added that the demand for plastic packaging material is coming down because of high food prices, as is the market for ice cream cups and packaged food items. Small companies do not engage in hedging or future contracts in anticipation of price fluctuations.
Industry experts say price volatility has been a significant issue facing the plastics industry for several decades and it exposes both buyers and sellers of polymers to a high level of price risk.
With volatility rising to over 50 per cent in recent years, any increase in crude oil price will directly push up the price of raw materials for plastics.
A number of plastic manufacturing firms are concentrated in the Gulf region and the plastic industry – which is located close to the oil fields – and the petrochemical sector is hit hard by the unprecedented rise in crude oil prices.
GULF TO BECOME BIGGEST PLAYER
The Arabian Gulf is poised to become the world's largest producer and exporter of petrochemicals and plastics in the next few years. According to Al Fajer, organisers of Arabplast – an annual exhibition of the plastics industry – the annual export of petrochemical products from Gulf countries is over 30 million metric tonnes and the region plays a key role in the global plastics industry, as it is supplying almost 80 per cent of crude oil worldwide.
The plastics sector is developing rapidly with a constant increase in the number of manufacturers in the region. The demand generated from the booming local construction and engineering sector is expected to trigger an estimated annual growth of over 30 per cent in the UAE's plastic industry.
According to industry sources, the high plastic price is also forcing some manufacturers to use recycled and substandard quality of plastic raw materials.
Bala Krishna, General Manager of Alpha Emirates Plastics, Sharjah said: "Whenever crude prices go up, plastic prices go up correspondingly and big manufacturers such as Bourge, Sabic and Cosmoplast, increase their prices accordingly.
"Big companies get inside information about the crude oil market two months in advance and they revise their prices based on that. In order to keep the cost of production low, plastic manufacturers mix in recycled and cheaper varieties of plastic. While the market price of a tonne of virgin plastic may be $100 per tonne, the recycled plastic will be available for $48 per tonne. There are many recycled plastic manufacturers who are competing in terms of price."
Alpha Emirates processes about 600 tonnes of recycled plastic every month and there are many small units recycling 10 to 15 tonnes per month. According to Krishna, the other major challenge facing plastic manufacturing firms is the high cost of operation, especially rent and energy costs in the UAE.
"Plastic manufacturers in Europe get subsidised power and other benefits. The UAE government does not offer any incentives," he said.
Alpha Emirates increases its prices according to the local market situation and the crude oil price, he added.
Khouser Ali, Purchase Manager at Al Ain Plastic Industries, said the big raw material suppliers, such as Sabic, Bourge and RAK Al Khaleejia, jointly increase prices every month but companies that convert raw plastic to finished goods cannot increase their price correspondingly.
"Big suppliers are dealing with only 20 big customers, we are dealing with 500 customers. In the last six months alone, they have increased prices by around 80 per cent. The crude price and their relative monopoly are major reasons for this. If we increase the price according to raw material costs, our customers will go to the next company and get a discounted price," Ali said.