Cracker dream going, going…

With the recent reduction of tariff on imported resins from 15 percent to 10 percent, the dream of having in the Philippines an integrated petrochemical industry —— starting with the production of polymers down to plastic products —— is fast fading.

Recently, to pursue the dream to build a naphtha cracker (needed to produce polymers), resin makers from the Association of Petrochemical Manufacturers of the Philippines had asked the government not just to keep tariffs at 15 percent but raise them to 20 percent if not to double to 30 percent up to 2010.

But after the government still favored the further reduction of tariff on resin production, APMP members resignedly said they will abide with a heavy heart, but will watch closely developments in the market.

Resin manufacturers are already reeling from the current resin glut in the Asian market. Two companies have already closed shop and the lone survivor is now running at an average capacity of 40 percent. Resin imports, on the other hand, are still rising.

Shy investors get cold feet

With the industry saddled with over P20 billion in debts, there is almost nil chance of finding financiers to build a naphtha cracker. A naphtha plant produces polymer compounds like ethylene, propylene, and butene that are used to make resins; the latter is used to make plastics.

Existing local resin manufacturers have the biggest stake in putting up a cracker plant. If they make (instead of importing) ethylene and similar compounds, this would make them more competitive vis-à-vis other manufacturers elsewhere in the region.

Since duties on imported resins are just at seven percent, resin manufacturers are highly vulnerable to regional price wars whenever a glut occurs. Just as what is happening today.

A history fraught with hopes

In the past, studies showed that the Philippines could accommodate at least two naphtha cracker plants and more than 15 facilities for polymers. These studies were done during the boom years or before the Asian crisis.

While some say that the conclusions of these studies are questionable and may have been funded by private firms with selfish motives, a naphtha cracker would have significantly brought down the basic raw material cost for making plastics.

Following the results of such studies, plans for at least two naphtha cracker projects were nurtured in the last 10 years. Not one, though, had taken off beyond a memorandum of understanding, exploratory talks, and feasibility studies.

For the meantime, downstream industries have been subordinating their business plans while the country’s resin manufacturers and government chased after the naphtha dream. Painful as it may seem, the dream of owning our own naphtha cracker may need to be buried for good.

Domino effect could backfire on us

Of course, the problem does not end here. Other members of ASEAN are now using the country’s liberalization slowdown (especially with regards to the petrochemical tariff decision) to justify similar actions.

In trying to achieve a win-win solution for the petrochemical sector, the government courted criticisms from its counterparts in ASEAN since duties on resins and plastics should all go down to five percent starting this year in line with the country’s formal entry into the regional block called the ASEAN Free Trade Area (AFTA).

Malacañang said the Philippines would invoke Article 1 of the CEPT (Common Effective Preferential Tariffs) Exclusion List that allows ASEAN members to suspend or slow down tariff liberalization on industries that could not yet cope in an open market.

However, some sectors are concerned that reversing or even just slowing down the implementation of the liberalization policy – even if it pertains only to the petrochemical sector —— will affect the entire manufacturing balance.

While the rest of the world is enjoying cheap goods, Filipino consumers may have to continue to pay for more costly consumer items from their already marginalized incomes.

Issues about VAT on TV

"Isyung Kalakalan at Iba Pa" on IBC-13 News (5 p.m. and 10:30 p.m., Monday to Friday) completes this week discussions on the pros and cons regarding the expanded VAT on professionals including entertainers. Next week, we take a look again at the risks involved in using LPG. Watch it.

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