According to newspaper reports, Reliance Industries announced a cut in prices of polypropylene and polyethylene, which coupled with the price cut announced a few days back (average 7%) would amount to a 16% cut price reduction.
Reliance Industries (FY99 Sales Rs 14.5 bn) is India's largest private sector company. Its activities encompass polyester, fiber intermediaries, polymers, chemicals and branded textiles. The new ventures are in the core sectors of oil and gas, power and telecom. Reliance Industries is also the promoter of Reliance Petroleum Limited, which has a refining capacity of 27 m tonnes per annum.
(* - latest available price)
The sharp downtrend in prices of polypropylene and polyethylene should be a cause of concern for Reliance Industries. This is mainly due to the fact that the prices of the raw material, crude oil, have been sky rocketing. Thus, the company is likely to suffer a sharp erosion in margins if the current down trend in prices is to continue.
Reliance, however, has certain advantages over other petrochemical companies. The company now sources a large part of its requirement of petroleum products from Reliance Petroleum, a group company (50% subsidiary). This will limit the hike in price of raw materials that are sourced from RPL. Also, given the large capacities and the volume driven nature of the business, Reliance will be able to minimise the effect of shrinking margins. Lastly, the company has an excellent track record when it comes to controlling costs and recording growth even in severe downturns (witnessed over the last 2-3 years).
Whether the sharp downturn in prices is just a correction or a trend cannot be said with surety. Nonetheless, companies will be taking a serious view of this sharp correction or downtrend.
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