E-Portfolio Assignment / Plastics

a. Executive Summary

Plastic is a highly resourceful material with many uses in everyday life. Plastics consumption has increased substantially and the demand will continue to grow. Polypropylene (PP) is a form of plastic and is a by-product of oil refining. PP is a light, highly resistant plastic resin used in packaging, coating, pipes, and tubing. PP is has a wide variety of uses and has a presence in several markets including food, pet, do-it-yourself and outdoor furniture. In the packaging market (films), PP boasts a cost efficient advantage over polyvinylidene chloride (PVdC)-coated films. According to Toray Plastics America Inc, using PP over PVdC can save as much as 10% to 25%. Market and economic conditions have a strong influence on the price of PP. Spikes in Crude Oil costs as well as short supply during high demand.

b. Individual Product Pricing Component

"Applied Extrusion Technologies, Inc. (AET) is North America's leading developer and manufacturer of highly specialized plastic films used for flexible packaging, product labeling, consumer packaging and graphic media applications" (AET Films, 2005). AET depends on polyolefin raw materials in order to manufacture oriented polypropylene (OPP) films used in production for labels, food packaging, gift-wrap, and barrier film for prolonging the shelf life of certain food items. "OPP, oriented polypropylene, is a flexible material derived from melting and orienting (stretching!) a polymer called polypropylene. This raw material, an oil by-product, is inert and unaffected by most chemical agents occurring in everyday life. It meets the requirements of the US Food and Drug Administration and other relevant authorities throughout the world. Uncoated polypropylene contains primarily carbon and hydrogen, and includes no heavy metals or other environmentally hazardous substances." (Exxon Mobile Chemical, 2005)

AET supplies Frito-Lay, Nabisco, and Coca-Cola to name a few, with oriented polypropylene (OPP) films for labeling and packaging their products. OOP films allow organizations to provide improved moisture barriers, puncture resistant and grease barrier protection to their regular cardboard packages. This assures the end-user (consumer) durable, fresh, and safely packaged items once purchased at the local grocery, department, or do-it-yourself stores.

Companies can use three other films in place of OPP, Polyester, Cellophane and Nylon films. Polyester Films are more appropriate for items that have my have exposure to high heat, (ovens, and microwaves) and for high-speed packaging and packages that necessitate high oxygen barrier (Exxon Mobile, 2004). Cellophane Films have an environmental advantage because they are made of wood pulp and are biodegradable (Packaging Films, ND). Finally, nylon films are "a transparent, non-heat stabilized plastic film. They absorb water. The higher the moisture content the more flexible they become. They offer excellent thermal and chemical resistance, with high tensile strength, flexibility and tear resistance." (Packaging Films, ND).

OPP is highly responsive to changes in the market; therefore, it is elastic in price. If costs are high while the plastic prices are low, the producers slow production to avoid operating at a loss. Thus, the supply comes down in order to match the demand so the price stays up. When prices are low, the opposite occurs.

The issues that affect consumer demand are prices of crude oil, Natural disasters such as Hurricane Rita. There does not seem to be an apparent strategy to enhance revenues in the plastics market given the many factors that affect the price. Cutting production costs and other internal costs is the best method to enhance revenues.

c. Cost Component

Many factors contribute to polypropylene (PP) prices. Unstable prices of crude oil have significant impact on polypropylene suppliers' operating costs. "In a 15-page report on the impact of high oil prices on the world economy, the International Energy Agency noted that worldwide demand for crude oil is increasing faster than supply. This is straining worldwide capacity and causing the continually increasing prices, particularly in China, the United States and India, where the demand has been highest." (Austin, 2004). Other factors are export opportunities, and tight supply of polypropylene while the demand requires running plants at maximum output. However due to Hurricane Rita, the plastics industries are facing never seen before issues. According to a press release Issued by David Terhune President of AET " Hurricane Rita was not nearly as destructive to the land as Katrina, but caused major damage in the Gulf and further disruptions in the supply of propylene monomer and polypropylene resin, as over 70% of capacity shut down in advance of this storm. With the landscape changing rapidly, we expect to be able to maintain supply, but cost increases will be daunting." (Oct 2005).

Technology seems to have a positive affect on the average cost of polypropylene. Several companies have formed joint ventures in order to improve technology and productivity to maintain or reduce the average cost of production. As an example, Novolen Technology Holdings and Equistar companies joined forces to license a technology that removes wood, glass, and metal from polypropylene. (Equistar, ND). Technology also paved the way for polypropylene to expand into different markets. The company Basell Polyolefins replaced the Spheripol process with the Spherizone process. Anton de Vries president of R&D states "The Spheripol process features a continuous circulating loop encompassing one polymerization zone, and the new Spherizone technology employs a multizone circulating reactor that applies catalytic cracker technology" He further stated that "The new process will allow expansion of polypropylene into nontraditional markets."

After researching prices and technology, there does not seem to be a clear indication that new technology or efficient production influence pricing in either direction. It is evident that supply and demand coupled with the sharp increases in crude oil and monomer prices drive the price of polypropylene. In September of 2005, prices were at $900-925 per ton, which was an increase of $150 per ton in July. This is a change in routine because prices are usually higher in the spring and late autumn (London Metal Exchange, October 2005). The overall cost of plastic products is approximately 10% of the total cost while the other 90% is supply-demand (Chem-Orbis, ND). Given this information, it is easy to assume that technology has little impact on the total average cost and a significant impact