1 Industry Structure and Competitiveness PETROCHEMICAL INDUSTRY Introduction The competitiveness of the petrochemical industry is a key factor in the competitiveness of the downstream plastics industry, which includes plastic packaging products, a key input of the Philippine export sector. The objective of this study is to analyze the state of competition within the petrochemical industry (as an input to the plastics-based packaging industry), using an analytical framework specially developed for this purpose, and to make recommendations, if necessary, on how to make the industry competitive or how to improve its competitiveness. It has been suggested that highly competitive input sectors of export industries, particularly plastic resins for plastic packaging materials used in food packaging, will translate into a highly competitive Philippine export sector. The petrochemical industry centers around the production of plastic resins. Plastic resins are used in a wide range of applications, as depicted in Figure 1. Monomers, a derivative of naphtha cracking, are used in the manufacture of these resins. Using a process known as polymerization, the monomer molecules are linked in long chains to form polymers: polyethylene (PE), polypropylene (PP), and polystyrene (PS), and others, such as polyvinyl chloride and polyester. The polymers are molded, extruded or specially processed into various items such as consumer goods, packages, construction materials, appliances, and industrial goods.
Transcript
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Industry Structure and Competitiveness
PETROCHEMICAL INDUSTRY Introduction
The competitiveness of the petrochemical industry is a key factor in the
competitiveness of the downstream plastics industry, which includes plastic
packaging products, a key input of the Philippine export sector.
The objective of this study is to analyze the state of competition within the
petrochemical industry (as an input to the plastics-based packaging industry), using
an analytical framework specially developed for this purpose, and to make
recommendations, if necessary, on how to make the industry competitive or how to
improve its competitiveness.
It has been suggested that highly competitive input sectors of export industries,
particularly plastic resins for plastic packaging materials used in food packaging, will
translate into a highly competitive Philippine export sector.
The petrochemical industry centers around the production of plastic resins. Plastic
resins are used in a wide range of applications, as depicted in Figure 1. Monomers,
a derivative of naphtha cracking, are used in the manufacture of these resins.
Using a process known as polymerization, the monomer molecules are linked in
long chains to form polymers: polyethylene (PE), polypropylene (PP), and
polystyrene (PS), and others, such as polyvinyl chloride and polyester. The
polymers are molded, extruded or specially processed into various items such as
consumer goods, packages, construction materials, appliances, and industrial
goods.
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Competition and Competitiveness Analysis
I Defining the Relevant Market A relevant market is defined as, “… a product or group of products and a
geographical area in which it is produced or sold such that a hypothetical profit-
maximizing firm, not subject to price regulation, that was the only present and future
producer or seller of those products in that area likely would impose at least a ‘small
but significant and nontransitory’ increase in price, assuming the terms of sale of all
other products are held constant. A relevant market is a group of products and a
geographic area that is no bigger than necessary to satisfy this test.”1
Simply put, a relevant market is defined by the product or service involved, the
geographical area in which said product or service is sold, and the sellers and
buyers of such product or service.
! Product Market
The relevant product market is defined as local and imported local and
In defining the relevant product market, the approach followed is: assuming a
hypothetical monopolist for a product, would said monopolist profit by imposing at
least a small but significant and non-transitory increase in price?
1 As defined by Section 1 of the U.S. Department of Justice and Federal Trade Commission
Horizontal Merger Guidelines dated 2 April 1992.
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There are three (3) major plastic resins, or polymers, used in the manufacture of
food packages: PE, PP and PS. Assuming the existence of a domestic monopolist
manufacturing these commodities, said monopolist would not likely profit from a
price increase since the makers of plastic packaging materials have the option to
switch to imported plastic resins. Since the monopolist is unlikely to profit, a product
market composed solely of locally produced PE, PP and PS is too narrow.
Combining local and imported PE, PP and PS, the question is again asked: would a
monopolist manufacturing these commodities now profit from a small but significant
and non-transitory increase in price? In this instance, the answer would now be
positive since practically the entire universe for these resins has been included.
Thus, the relevant products are local and imported PE, PP and PS.
PE, PP and PS fall under the category of thermoplastics. Thermoplastic resins
soften repeatedly by heating. These can be melted down from their molded forms
and reprocessed or remolded into new products. Of the three, PE and PP are the
thermoplastics in greatest demand.
! Geographical Market
The geographical market for the petrochemical industry, specifically
thermoplastic resins classified as polyethylene (PE), polypropylene
(PP), and polystyrene (PS), is defined as the Philippine national
territory.
The geographical market is defined thus: it is the region where a hypothetical
monopolist, being the only present or future producer of the product, could profitably
impose at least a small but significant and non-transitory price increase holding the
terms of sale constant at all other locations. Defining the geographical market has
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become much more difficult with the increasing globalization of markets and the use
of electronic trade, e.g. ordering through the Internet.
For purposes of this study, the geographical market for PE, PP and PS will be
defined as the Philippine national territory.
! Participants in the Market
The relevant participants in the market are the domestic producers of
polyethylene (PE), polypropylene (PP), and polystyrene (PS), and the
importers of the same.
(a) PE Producers
JG Summit Petrochemical Corporation (JG Summit), located in Batangas, is
the sole producer of PE. Importers of PE, considered as a group, would be
the other market participant.
(b) PP Producers
Locally, only two (2) companies manufacture PP: JG Summit and
Petrochemicals Corporation of Asia-Pacific (Petrocorp), located in Bataan.
The third market player would be importers of PP.
(c) PS Producers
There are three (3) types of PS: general purpose (GPPS), expansible
(EPPS) and high impact polystyrene (HIPS). There are only (3) firms in the
industry manufacturing PS: Philippine Petrochemical Products, Inc.
(Petrochem), located in Cavite; Chemrez, Inc. (Chemrez), an affiliate of the D
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& L Industries Group of Companies, located in Quezon City; and SMPI. The
final market player would be importers of PS.
Note that a competitiveness analysis of the Philippine market for plastic resins as
used in food packaging manufacturing is not complete without considering the
suppliers that are based abroad. For the purpose of the study, foreign
manufacturers/suppliers are treated as one market group and the value of the
imports used as a basis for calculating their market share.
II Calculating Market Share
In order to make an accurate evaluation of the degree of competition within a
market and the presence of market dominance and abuse, the calculation of market
shares is necessary.
Sales are considered the best indicator of a firm’s future competitive significance.
Thus, market shares are ideally estimated based on sales that may be committed or
profitably employed within the market.
For the purpose of estimating the market shares of imports, importers were treated
as a single market supplier. The lack of available data makes disaggregation
according to importer impracticable. In addition to this limitation, import data are
undervalued, on the one hand, since CIF values were used instead of landed cost
(in cases where the importer is the end-user) or selling price (in cases where the
importer is a trader). Assumptions to be used to adjust these values to the level of
landed cost or selling price may further distort the true cost of the imported product.
On the other hand, the import figure is overvalued since data cannot be
disaggregated into the value of thermoplastic resins used for the manufacture of
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plastic packaging materials and the value of thermoplastic resins used for the
manufacture of other made-up plastic articles.
(a) PE
JG Summit’s annualized domestic market share in 1998 is estimated at 73% for
linear low-density polyethylene (LLDPE) and 44% for high-density polyethylene
(HDPE). Using these figures, the company’s share of the total PE market would be
58.5% and imports would account for 41.5%2.
(b) PP
Petrocorp’s estimated market share for PP is 47%. For JG Summit, its annualized
share is estimated at 47%. Imports would then have a 6% share.
(c) PS
Petrochem’s domestic market share for PS is estimated at 26% in 1997. Chemrez’
share is slightly higher, estimated at 30% during the same year. According to
another industry source, imports account for 20% - 25% of the PS market. The rest
of the market is then divided as follows: Chemrez with 40% - 45%, Petrochem with
35% - 40%, and SMPI with around 15%. Based on these figures, the market share
of each participant is estimated as follows: Chemrez – 36%, Petrochem – 32%,
SMPI – 12%, and imports – 20%.
2 Importers are considered as a single market supplier; disaggregation according to importer was not
possible due to data constraints.
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III Evaluating Level of Concentration
Market concentration depends on the number of firms in a market and their
respective market shares.
The level of concentration, i.e. ownership of firms and industry structure, in the
petrochemical industry, specifically in the are of PE, PP, and PS, was computed
using the Herfindahl-Hirschman Index (HHI). The HHI is an indicator used in the
U.S.A. It is the sum of squares of the individual market shares of all the market
participants.
Under American law, the HHI is not strictly mandated in any situation, even in
mergers. Rather, it is used in guidelines of the U.S. Department of Justice when
reviewing mergers. Courts have adopted the guidelines, including the HHI, as
useful in analyzing mergers, and they look to the HHI for guidance in other areas of
antitrust law as well. While the HHI has no “legal” authority, courts, regulators and
economists recognize it as a useful tool in analyzing market concentration in
mergers and other areas of antitrust law. An HHI of 10,000 means a pure
monopoly, while an HHI approaching zero indicates an atomistic market3.
Based on the market shares determined in the preceding section, the Herfindahl-
Hirschman indices are shown below:
3To aid in the interpretation of HHI, the U.S. uses the following approach: below 1,000 # not concentrated between 1,000 and 1,800 # moderate concentration between 1,800 and 10,000 # high concentration An HHI of above 1,800 is considered “highly concentrated” even though it seems a long way from 10,000, i.e., absolute monopoly power. This is because, in the merger context at least, U.S. antitrust
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Table 1. Herfindahl-Hirschman Indices
Polymer HHI Polyethylene 5,144
Polypropylene 4,454 Polystyrene 2,864
Using the U.S. guidelines, all three markets are highly concentrated. It should be
noted that the HHI figures may tend to be overestimated since importers/traders
were considered a single market player.4
IV Other Factors Affecting Competition and Competitiveness
! Factors Affecting Entry Into and Exit From the Industry
The conditions of entry have a significant impact on the degree of competition within
a market. Ease of entry ensures that incumbent firms do not abuse market power
and remain inefficient/complacent since potential market participants, attracted by
excess profits, can readily enter and provide stiff competition. There would be
constant pressure to reduce costs to prevent entry so output and prices would be at
competitive levels. Prices, in particular, would be maintained at the minimum level
required to maintain profitability (i.e. in the short-run, price = marginal cost and in
the long run, price = marginal cost = minimum long-run average total cost). On the
other hand, where barriers to market entry exist, anti-competitive actions are more
likely.
laws are concerned not only with mergers that result in a monopoly, but also with mergers that result in a highly concentrated market. 4 An industry source from the PS sector believes that his sector cannot be considered highly
concentrated since imports have been gaining a greater share of the domestic market due to a reduction in PS tariffs.
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The supply and demand for plastic resins, or polymers, is viewed within a global
market context. The rest of the world actively exports such commodities to markets
including the Philippines. Thus, factors affecting entry would likewise have an
impact on the ease or difficulty of entry of imports into the Philippine domestic
market.
(a) Investment Cost
Entry requires large capital outlay. The capitalization of the largest of existing firms
in the industry as of 1997 was almost P3 billion. Thus, difficulties may be met in
terms of required capital investment. On the other hand, the desired period of
investment recovery may not be realized because industry claims that government
has not delivered the package of support it promised the industry, e.g. tariff,
preferential interest rates, etc.
In any event, despite the stiff investment needed, a new firm, Bataan Polyethylene,
is scheduled to begin operations in 2000.
(b) Size of the Market
The size of the local market limits market participation to very few large firms.
(c) Laws and Regulations
(1) Tariff Policy
Table 2 presents the tariff rates on polymers and plastic-based
packages from 1990 to 2000. The rates of duty on PE and PP were
declining from 1990 to 1997 but increased to 15% in 1998 after the
start of the local industry’s commercial operations. For PS, rates of
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duty were aligned with PE and PP rates in 1999 and 2000 after the
industry undertook expansion and upgrading of production facilities.
With respect to the ASEAN Free Trade Area (AFTA) – Common
Effective Preferential Tariff (CEPT) Scheme, the three (3)
commodities are still currently excluded from the list of products
subject to preferential tariffs. They will, however, be phased into the
CEPT Scheme by 2003 at the latest, with duties ranging from 0% -
5%.
Table 2. Chronology of Tariff Rates on Polymers
and Finished Plastic Packages (1990 - 2000, in % ad valorem)
One of the petitions considered in the public hearing on identified
Philippine winners, held by the Tariff Commission during the latter part
of 1997, was a 20% tariff on polymers. A strong argument raised
against the granting of such tariff increase is the adverse effect on
production cost of downstream industries, including the plastic-
packaging industry, which makes extensive use of polymers as raw
material. The Department of Trade and Industry (DTI), through the
Board of Investments (BOI), disputed this, stating that the incremental
effect on the cost of packaging is minimal. Nevertheless, the Tariff
and Related Matters Cabinet Committee, and later upheld by the
National Economic Development Authority (NEDA) Board, approved
the granting of an increase in tariff, at 15% for a period of three years
starting 1998. This was embodied in Executive Order No. 486 (s.
1997).
The issuance of E.O. 486 aggravated the distortion in the tariff
structure of the petrochemical and plastic industries such that raw
materials were levied a higher rate of duty of 15%, while finished
products were levied duties of 3% to 15%. The polymer producers
were therefore petitioning for a rationalization of the tariff stucture
which would include a parallel increase in the tariff rates on finished
plastic packages. Expectedly, the resulting effective protection rates5
(EPRs) for finished plastic packages were lower than EPRs of
polymers because of the distortion. What is evident is the
deterioration in effective protection becomes more pronounced as the
cost share of resins to finished package increases.
5 The effective protection rate (EPR) is defined as the percentage excess of domestic value added
over world market value added due to the imposition of tariffs and other protective measures on a product. The higher the EPR of an industry or activity, the greater the protection enjoyed from tariffs and similar measures. The EPR estimates cited in this study were sourced from the Tariff Commission.
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Table 3. Estimated EPR of Plastic Packages (1998, in %)
Rigid Flexible EPR (4.74) 8.43
Source: Tariff Commission
According to industry sources, additional tariff protection is needed at
this point to maintain the industry’s viability. The huge investments
that have been made are being threatened by the current depressed
demand conditions due to the financial crisis and consequent
oversupply in the world market.
(2) Investment Incentives
➲ JG Summit - JG Summit was registered with the BOI on
24 May 1994 as a new domestic producer of PE and PP under
the 1987 Omnibus Investment Code. Under this registration,
the company is entitled to certain incentives such as: (1)
income tax holiday for six (6) years from projected start of
commercial operations or actual start of commercial operations
whichever comes first; (2) additional deduction for incremental
labor expense, (3) tax and duty free importation of capital
equipment, (4) tax credit for taxes and duties paid on raw
materials used for its export products, (5) exemption from
contractor’s tax, wharfage due and any export tax, duty, impost
and fees, (6) employment of foreign nationals, and (7)
unrestricted use of consigned equipment. On 2 October 1998,
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the BOI granted the firm’s request to move the reckoning date
of its income tax holiday incentive from October 1998 to
October 2001. This was pursuant to existing policy on income
tax holiday availment of registered enterprises invoking
operational force majeure on peso devaluation related to the
Asian financial crisis.
➲ Petrocorp - Petrocorp was registered with the BOI on 27
February 1991 as a preferred pioneer producer of
polypropylene resins under the 1987 Omnibus Investments
Code. Under this registration, the company is entitled to the
same incentives as that noted for JG Summit. The company
also registered with the BOI on 29 December 1994 as a new
domestic producer of ethylene and propylene resins on a
preferred pioneer status under the 1987 Omnibus Investments
Code.
➲ Petrochem - Petrochem was registered with the BOI on
20 January 1969 and 13 September 1989 and thus enjoyed the
same incentives previously cited in the early years of its
operation. The second BOI registration did not include several
incentive features.
During the latter part of 1998, the Economic Mobilization Group initiated a request
for interim upward tariff adjustments for various products, as a temporary protection
measure from adverse effects resulting from the Asian economic crisis. Of the
plastic resins included in the request for additional 10% duty, only polystyrene tariff
was adjusted, and only to 15%, as embodied in E.O. 63 (s. 1998), to align this with
tariffs on PP and PE.
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(3) Administrative Order No. 58
A.O. 58 was issued by Malacañang, constituting a Petrochemical and
Plastics Mobilization Task Force (PPMTF) and granting the same the
power to monitor and regulate importation of plastic resins, as well as
withhold the release of shipments if there is reason to believe that the
importation constitutes dumping, undervaluation, misclassification or
any unfair trade practice. An importer of plastic resins was required to
obtain a license from the PPMTF. The PPMTF also had the power to
direct the Bureau of Customs to seize any plastic resins imported
without the permission of the PPMTF. The creation of the PPMTF
with its powers clearly constitutes anti-competitive behavior,
presenting a barrier to entry by other firms in the industry and
detrimental to the downstream plastic industry.
However, even before A.O. 58 became enforceable, the Executive
Department amended it upon advice of the DTI. The original A.O. 58
was violative of Philippine commitments under the World Trade
Organization (WTO) since it goes against the basic General
Agreement on Tariffs and Trade (GATT) principles of protection only
through tariffs and the general prohibition to institute or maintain
quantitative restrictions. The amended administrative order, A.O. 58-
A, now focuses on competitiveness enhancing measures for the
industry.
(4) “Fingerprinting”
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Perhaps, the more important development is the plan to introduce the
"fingerprinting" administrative mechanism for petrochemical products.
The current tariff structure does not differentiate tariff rates between
locally manufactured and imported plastic resins because of the
difficulty identifying various resins and resin grades. The
"fingerprinting" mechanism provides a way to determine these. With
the mechanism in place, tariffs can be differentiated on the basis of
availability, so that importers of PE, PP and PS grades6 which are not
locally manufactured, can avail of lower tariff rates, and thus avoid
being penalized by high raw material prices. This will result in
improved access to raw materials by downstream industries and
enhanced competitiveness for its products.
However, the “fingerprinting” mechanism may be subject to abuse by
agencies enforcing them, especially when designed in a way as to
give wide latitude for interpretation and/or action, and as such, will be
a barrier than an incentive to entry.
(5) Trade Facilitation “Fees”
Industry sources confirm the pervasive practice of paying “facilitation
fees,” e.g. to customs personnel, in addition to required government
fees and taxes, in order to expedite the release of shipments of raw
materials, such as monomers, as well as plastic resins.
! Other Factors Affecting Competitiveness
This section discusses the other factors particularly affecting the competitiveness of
the domestic plastics industry.
6 JG Summit produces 36 grades of PP and PE.
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(a) Limited Local Production
The domestic industry does not manufacture the whole range of PE, PP and PS
resin grades. It manufactures less than the over 200 grades of PE, PP and PS
polymers, copolymers and homopolymers, which local converters import.
Industry sources state that while local manufacturers produce only a limited range
of products, these are the widely and commonly used inputs of downstream
industries. Existing or new firms can manufacture other resins and grades, but
manufacturers and converters alike are of the opinion that it is not profitable to
produce the whole range of products because of the absence of economies of
scale.
(b) Backward Linkages
The local industry is disadvantaged by the lack of a naphtha cracker plant, and thus
is unable to fully minimize production costs arising from the volatility of the world
prices of monomers7. The naphtha cracker project requires the existence of
polymer plants and the latter gain competitiveness with the naphtha cracker in
place. The industry plans to export in the future and the establishment of a naphtha
cracker plant8 will serve as a competitive enhancement measure. The major
7 Monomers contribute the largest share to the cost to produce and sell the different polymers. 8 On 29 January 1996, a Memorandum of Understanding was signed by Petrocorp, PNOC-PDC,
British Petroleum Chemicals Investment Ltd., Petron Corporation, Itochu Corporation and Bataan Polyethylene Corporation to participate in the establishment of a naphtha cracker plant in the PNOC-PDC complex.
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disincentive to setting up a naphtha cracker plant, however, is the investment cost,
which is estimated at US$600 million.
(c) Marketing and Distribution
Individual firms in the industry engage in direct selling, and require a minimum
purchase volume. User industries confirm that the petrochemical industry has an
efficient delivery system, and preferred/established customers can even request for
split delivery on orders.
(d) Access to Infrastructure
Improvement of roads is viewed as a complement to an efficient delivery system,
which is already provided by individual firms in the industry.
(e) Credit Terms
The industry offers liberal credit terms ranging from 30 to 60 days9, with discounts
on cash purchases. User industries report more liberal credit terms for
preferred/established clients.
V Assessment of Industry Performance
Plastic-based packages have gained in popularity in recent years. Food products
which are commonly packed in glass bottles or aluminum or tin cans are now
9 According to an industry source, the domestic PS industry grants credit terms of up to 120 days.
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available in plastic-based packages, e.g. plastic bottles, flexibles. Plastic packages
are valued for being highly economical, easily customized, lightweight and
shatterproof, handy and hygienic, and recyclable (i.e. they may be re-used for
purposes other than what they were originally intended for).
Plastic resins are the inputs to the manufacture of plastic-based food packages.
With the cost share of plastic resins running anywhere from less than 50% to almost
90% of total material input cost, the price of resins affects the cost and
competitiveness of finished packages and consequently the cost and
competitiveness of manufactured food products.
! Polyethylene and Polypropylene
PP and PE manufacturing started only in late 1997 and early 1998, respectively, the
result of a design of a masterplan for petrochemical development in the Philippines.
In July 1995, the Stanford Research Institute presented the master plan which
defined the Philippine petrochemical industry of the future, the competitive position
of the Philippines, the allocation of capital and resources, the timing of projects, and
the implementation and action program for the country. Based on a projected
increase in demand for petrochemicals, the master plan saw opportunities in the
establishment of 32 projects consisting of two naphtha cracker plants and
associated downstream plants, such that by the mid-2000s, the Philippines should
be self-sufficient in the manufacture of thermoplastics and their raw materials.
Since the 1995 masterplan, two world-class, world-scale petrochemical plants have
been built and currently operate. Thus, the initial stage of the plan has been
executed.
(a) Polyethylene
(1) Domestic Industry
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JG Summit, incorporated on 24 February 1994, began manufacturing
PE under the trade name EVALENE commercially, on 03 August
1998, with an annual rated capacity is 175,000 MT. Production
technology is capital-intensive using Union Carbide Corporation’s
“Unipol-1” gas phase technology. The company operates three (3)
shifts daily, seven (7) days a week.
(2) Employment
The company employs 264 personnel. Company assets amounted to
P7.3 billion in 1997, with capitalization at P2.9 billion. Funds used in
establishing manufacturing facilities were sourced mainly from equity.
(3) Financial Performance
Total sales volume was about three-fourths of the level of production.
It is interesting to note that there were already export sales.
(4) Production and Sales
Production of PE by JG Summit for ten (10) months in 1998 amounted
to 51,761 MT (see Table 4).
Table 4. Production and Sales of PE* (Quantity - MT, Value - P’000)
Production Sales Year Quantity Value Quantity Value 1998 51,761 1,329,222 Local – 38,318 984,006
Export – 1,294 33,230 *JG Summit started production in March 1998; the figures are for March to December 1998 Source: JG Summit Petrochemical Corporation
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(5) Imports
The volume of imports of PE was increasing at an average annual rate
of nearly 24% from 1991 to 1994 (see Table 5). Imports fell by 29% in
1995, then grew again in 1996 (by 47%) and 1997 (by 2.5%). As of
September 1998, the volume of imports recorded is only about 28% of
the 1997 level. This could probably be attributed to the availability of
PE locally with JG Summit starting production during the year.
*Figures for 1998 refer to combined sales and production of Petrocorp (January to December) and JG Summit (June to December); JG Summit started production only in June 1998 Sources: Petrochemicals Corporation of Asia-Pacific and JG Summit Petrochemical Corporation
(5) Imports
The volume of imports of PP was rather volatile, increasing from 1991
to1993, contracting in 1994 and 1995, then expanding again in 1996
and 1997 (see Table 8). In 1997, however, imports grew by only 2%
and in 1998, imports as of September were only 40% of the 1997
level. The decrease in imports for 1998 is partly attributable to the
According to industry sources, thousands of tons of PS and other
resins have been imported through Japanese trading houses that
have equity investments in some domestic electronic appliance
manufacturers. Consequently, the domestic industry is subjected to
more competition.
Price-wise, local PS is more expensive than imported PS by 7% to
10% (see Table 11). More recent data suggest a narrower spread,
however, with the prices of local PS only 2% to 4% higher than the
imported polymer. An industry source disputes the supposed higher
selling price of domestic PS and attributes the spread to credit terms,
"Just-In-Time" (JIT) delivery and technical service.
Table 11. Price Difference: Local and Imported PS (1998, P/MT)
Polymer Percent Difference of Local PS Selling Price
Over Imported PS Selling Price
HIPS 10.10 GPPS 10.69 EPS 7.40
Sources of basic data: Industry Survey and 1998 import entries on file with the Tariff Commission
According to industry sources, local production capacity for the supply
of PS is more than sufficient. However, the price “aggressiveness” of
other regional producers has created a competitive market where
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domestic prices of PS generally tend to be higher than that of export
prices in the region.10 The domestic PS industry can reduce its prices
further, if not for the high handling cost of imported monomers and
other high utility costs. The domestic PS industry can provide a stable
supply of resin with less price fluctuations (see Exhibits 1 and 2).
The domestic PS industry also provides JIT deliveries, credit terms
that range from 30 to 120 days, and technical service, as opposed to
imported PS.
(6) Exports
There are no significant export figures for PS.
(7) Effective Protection Rate
Similar to PE and PP, the manufacture of PS is protected by the tariff
structure. The estimated EPRs for HIPS, GPPS and EPS in 1998 are
all positive at 5.20%, 87.66% and 38.60%, respectively. The EPRs
should improve further as output tariffs have been increased in 1999
and 2000 to 15% (with the issuance of Executive Order No. 63), while
maintaining the tariff on the input, monomers, at 0%.
(8) Revealed Comparative Advantage
Revealed Comparative Advantage can only be computed where there
are significant export figures.
10 An industry source claims that international trade is carried out via marginal pricing and thus does
not cover the full costs of exporters from supplying countries.
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VI Conclusions and Recommendations
! Conclusions
(a) High Market Concentration
High market concentration is unavoidable given the huge investments required and
the size of the domestic market. These reinforce the dominant position of
incumbents and make it difficult for new players to gain successful entry into the
market.
Polyethylene manufacturing in the Philippines is a monopoly of JG Summit. The
company was established at a high investment cost but manufactures only a limited
range of product grades.
Polypropylene manufacturing in the Philippines is oligopolistic in nature --- two large
firms manufacturing a limited range of products and product grades. Apart from JG
Summit, the only other local manufacturer of PP is Petrocorp.
The polystyrene industry is likewise an oligopoly. There are only three companies
comprising the industry, and manufacturing three types of PS --- general purpose,
expansible and high impact polystyrene.
The HHI figures bear out the above: all three markets are considered highly
concentrated.
The high level of concentration could easily lend itself to abuse of market power.
The likelihood of such abuse, however, would be better considered together with
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other factors affecting entry, e.g. tariff and other government incentives, A.O. 58-A
and trade facilitation.11
(b) High Tariffs Affect Entry Into the Industry
High tariffs serve as an incentive to entry since the domestic market is “shielded”
from foreign suppliers. The pricing behavior of the industry indicates that it is taking
full advantage of output tariffs. While locally produced polymers are generally more
expensive than imports, the price difference is narrow. This shows that the industry
leans more towards import parity pricing, as admitted by an industry source.12 Tariff
provides the means for industry to price its products at, or near the level of the
export price of imported resins. An industry source stated that the firm he works for
can become competitive by the year 2003 even with a 5% tariff rate on imported
resins.
Local manufacturers, moreover, can exercise flexibility to raise prices at still higher
levels because the difference will be taken care of by the cost of trade facilitation
borne by importers, in this case the plastic-packaging industry. With minimal
difference in prices between local and imported polymers, plastic-packaging
manufacturers would tend to favor domestic supply over imports, if only to avoid the
cost of dealing with the Bureau of Customs.
11 According to an industry source from the PS sector, stiff internal competition within the domestic
industry and the presence of multiple importers who compete not only with the domestic industry but also among themselves preclude any abuse of market power. There is no dominant player.
12 The industry source admitted that the firm he works for does engage in parity pricing and that he
saw nothing wrong with such a practice. He claimed that by buying locally, downstream industries save on banking costs, foreign exchange fluctuations, advance duties and taxes, and payment can be made on credit terms. Another industry source in the PS sector claimed that his firm does not practice parity pricing. Still another industry source from the PS sector claimed that when tariffs on PS were at 20% and 30%, domestic prices were way below prices of imported PS. It was further claimed that the perceived parity pricing is merely a consequence of the narrowing of the gap between prices of domestic and imported PS with the reduction in PS tariffs. It should be noted, however, that the recent increase in PS tariffs under Executive Order No. 63 (s. 1998) gives the domestic PS industry an opportunity to raise local prices.
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A.O. 58-A adds yet another layer of government intervention to importation. The
proposal to correct tariff distortions through an administrative mechanism may be
the next best solution to outright tariff reduction, but should the “fingerprinting”
mechanism be adopted, this would imply additional cost to importers because of the
required testing procedure. This may also be abused and unreasonably used to
hold the release of shipments and/or extract additional facilitation “fees.”
In this case, potential monopolistic/oligopolistic behavior is aided by the presence of
high tariffs and government bureaucracy.
With respect to fiscal incentives provided by the government, these obviously are an
incentive to entry in the industry.
! Recommendations
Competition policy can address uncompetitive behavior arising from high market
concentration and sustained by entry barriers.
(a) Trade Liberalization and a Competition Agency
Competition policy can play a critical role in ensuring that monopoly and oligopoly
positions are not abused. A competition agency to monitor the behavior of firms is
of vital importance. This is particularly necessary in the case of the petrochemical
industry, which is characterized by monopolistic and oligopolistic players.
The current thrust towards trade liberalization should likewise be pursued in order to
promote an incentive structure that induces efficiency and productivity while at the
same time discouraging monopolistic/oligopolistic behaviour. Although trade
measures are part of trade policy, trade reforms could also form part of competition
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policy since the reduction of trade barriers also enhance competition in the domestic
economy.
(b) Trade Facilitation
In addition to trade liberalization, measures to enhance trade facilitation would also
help considerably. If the transaction costs associated with facilitating importation
were reduced, the petrochemical and plastic-packaging industries, which import
their raw materials, would lose one source of competitive disadvantage.
(c) A.O. 58-A
Competition policy should address the concerns raised in A.O. 58-A. Particularly,
the proposed administrative mechanism should be designed to facilitate the
importation of polymers, which are not locally manufactured.
(d) Forward and Backward Linkages
The viability of the petrochemical industry with regard to the production of
thermoplastic resins and the downstream industries is interdependent with each
other.
(1) Integrated Development Plan
The upstream and downstream industries should meet and formulate an
integrated development plan. For instance, to save on distribution costs,
upstream and downstream industries could cluster, i.e. downstream
industries could be encouraged to locate near the petrochemical plants and
their resin supply directly piped into their factories.
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(2) Consolidation of Supply Requirements
Downstream industries could also consolidate their requirements and buy
their resins together in order to avail of the lower prices for bulk buying.
(3) Cooperative Bidding
For big projects, upstream and downstream industries can work together to
come up with a competitive bid at specially negotiated prices from the
upstream industries.
(4) Requirement Projections
Downstream industries should inform the upstream industries of their
projected resin requirements, both in terms of volume and grades, to allow
the upstream industries to produce the same for them. Concerns over limited
production of polymer grades can be addressed by the upstream industries’
willingness to develop these for user industries. Upstream industries can
improve their competitiveness by offering prompt deliveries, technical
services, good product quality, and sales services.
The petrochemical industry is of vital importance to exporters of processed foods
since polymers are inputs to the manufacture of plastic-based packaging.
Obviously, the competitiveness of the country’s food exports is in good part
dependent on the competitiveness of its inputs. Since the nature of the
petrochemical industry can easily lead to the abuse of market dominance, the
judicious use of competition policy is of primary importance.
