Plastic Kingdom by Patricia L. Adversario

“We survived because the parent company supported us.”-Napoleon H. Vasay, JG Summit Petrochemical vice president for finance

But for now Go intends to ramp up production. Current production is 27,500 MT of polythylene (PE) and 26,400 MT of polypropylene (PP) a year. At full capacity of polymer plants can produce 320,000 MT of PE and 190,000 MT of PP a year – making up 80% of the country’s consumption of the two resins.

Products for the commodity markets such as plastic film and yarn will be the initial focus, but the group hopes to develop high value items such as high-density PE pipes and film in one or two years.

“In terms of revenue, if we’re able to sell 100% we’d be a $1 billion company. That’s a target but things are changing.” Should prices of naphtha continue to weaken, that could lower his target from $1 billion to $700 million to $800 million. That’s still a tall order. JG Petrochem’s last full-year revenue before the shutdown and expansion was $130 million in 2011.

The petrochemicals group expects to recoup its investment by 2022 assuming the Philippine economy will grow at least 5% a year. He says the rise in petrochemical use in other countries is usually 1..5 to 2 times the gross domestic product growth. “We’re betting on that,” Go adds.

UBS Securities Philippines, a stock brokerage, expects JG Summit’s petrochemical business to break even this year and post a net income of Php500 million by 2017 mainly from synergies between its naphtha cracker and polymer plants.

The fundamentals are there, says Go. The Philippines, with a population of 100 million, is one of the countries that consume the least plastics in the region. “But to build up the cracker we have to think regional and think global,” he says.

Local and regional challenges abound. New capacity spells competition. Malaysia’s petronas group plans to build a steam cracker complex in Johor and listed Titan Kimia Nusantara, a subsidiary of Lotte, plans to build a naphtha cracker complex in Merak, Indonesia in 2017.

On the home front, Petron’s Philippine Polypropylene Inc., is having already a “major ” competitor,having doubled its PP capacity to 300,000 MT a year.

Gas to Pellets

Petrochemicals are almost magical, enthuses Patrick Henry C. Go, executive vice president of the JG Summit Petrochemical group.

“Can you imagine gas becoming plastic pellets? You have these basic building blocks in one form converting into different form through catalytic reaction,” he says.

The first stage involves cracking, a process in which large hydrocarbon molecules are broken down either by steam cracking or catalytic cracking.

JG Summit Olefins (JGSO) owns the country’s first and only naphtha cracker. The plant produces ethylene and propylene and sells there to sister unit JG Summit Petrochemical, which converts them to polymers or plastic resins. The four other polymer producers are: NPC Alliance (then Bataan Polyethelene), Philippine Propylene (then Petrocorp), Philippine Resins Industries and Chemrez Technologies.

The resins are then sold to manufacturers who fabricate these into various industrial and consumer products for several industries.

According to Philippine Plastics Industry Association (PPIA), the downstream plastic industry is composed of more than 1,000 plastic fabricators with total investments estimated at Php600 billion. The industry is composed of small to medium scale enterprises. Total labor force is about 650,000.

The downstream industry’s combined gross value added – a measure of output – rose only 40% between 1999 and 2012, according to the National Statistics Office. But the volume of imported finished plastic goods more than doubled from 2001 to 2013.

Domestic producers of plastic resins have slowly increased their market share relative imports from 44% in 2001 to a peak of 51% in 2009. However,this dropped to 22% in 2013 after JG Summit Petrochemical shut down its polymer plants in 2012 in preparation for expansion.

To encourage more local production, various laws grant tax breaks and other incetives who put up petrochemical plants.

Executive Order No. 61 provides for a review of tariffs on plastic resins once a naphtha cracker or similar plant starts commercial operation. The tariffs from imports outside Asean were lowered from 15% to 10% in 2011. Imports from Asean are tariff-free.

Polymer producers are seeking to reverse the rate for imports outside Asean from 10% to 15%.

With the commercial operation of JGSO’s naphtha cracker and Petron’s Propylene Recovery Unit since April 2008, a review is due, says the Association of Petrochemical Manufacturers of the Philippines.

But plastic producers contend that raising the tariff will uncrease their raw material costs. The PPIA in its position paper to the Tariff Commission is calling for zero tariff on resins imported from outside Asean.

Local plastic makers still import more than half of their raw materials from outside the region because of unsteady supply of raw materials from Asean and local sources.

The Tariff Commission has set a comprehensive review of the tariff on petrochemical imports from outside Asean by year-end 2015.

Rafaelita M. Aldaba, assiatant secretary at the Department of Trade and Industry, says there is no need to provide more incentives. “But for existing incentives to be more effective, they must be accompanied by measures which address the most binding constraints affecting the growth of the industry.”

These include technical smuggling, high power and logistics costs, lack of research and development and few highly skilled workers.

The additional local capacity comes amid a move by local governments to ban the use of plastic bags, which are said to clog waterways and cause floods. The Philippine Plastics Industry Association (PPIA) has warned of a possible 20% to 30% decline in plastic manufacturers’ output if more towns and cities follow.

But the biggest challenge facing JG Summit Petrochemical is convincing local plastics makers it can compete with imports on price, quality and reliability of supply.

“Definitely JG Summit Olefins’ cost of production has gone down but will their prices reflect the savings of being a local manufacturer?” asks Vicente Go, vice president of PPIA.

Teo Kee bin , president of PPIA, says JG Petrochem has to price its products at par with Asean. “Thailand can ship their material at landed cost that’s lower than the local material. They ( JG Petrochem) should be cheaper.”
Any real advantage with sourcing material locally depends on the relationship with the supplier but ties between
JG Petrochem and local plastic manufacturers have been “strained” says Co. (SEE SIDE BAR.)

As part of the APMP, JG Petrochem is pushing for an increase in tariffs from 10% to 15% on plastic resins imported from outside Asean. Resins from Asean countries have no tariff.

The PPIA is opposing the petition. “Allow us to source our material where it’s cheaper – whether it’s from Asean or outside Asean,” says Teo. “We are not homogeneous efficient supply chain – everybody has their own interest to pursue.”

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