Vietnamese plastic masterbatch industry and the dependence on raw metarials

Vietnam plastic masterbatch industry is predicted to continuously facing the problem of dependence on raw materials resources. The plastic masterbatch industry is benefiting from the general growth of the economy as well as the increasing demand of plastic consumption sectors such as real estate – construction, food and non-food industries. However, this industry is also facing many difficulties, of which the most severe is the concern in raw materials supplying.

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Vietnamese plastic masterbatch industry still has a lot of excessive potential for development

In recent years, plastic is one of the leading industries in Vietnam with high growth rate of 16-18% per year. This industry took the second place after telecommunications and textile industry. High GDP growth in 2017 (6.81% per year) and optimistic forecasts for 2018 are also good signals for the plastics industry.

According to the Vietnam Plastic Association (VPA) in 2017, the total value of export of Vietnam plastic masterbatch industry reached over US $ 3 billion, increased by 17.6% compared to 2016. The amount of plastic and other related additives used per capita in Vietnam, it has also been increasing throughout the years. In 1990 it was only 3.8 kg / person per year. 20 years later, in 2010 this figure had increased to 33 kg / person / year and by 2017 to 41 kg / person per year.

The excessive potential for ​​the plastic masterbatch industry to develop is still large because although the consumption in Vietnam has risen in recently but this rate is quite low compared to the demand of other Asia regions of 48.5 kg / person per year as well as the average consumption rate of the world with 69.7 kg / people per year.

Plastic masterbatch manufacturers have abundant opportunities in various industries

With the segment of plastic used as industrial and construction materials, Vietnam is an opening market with great demand due to the warming of the real estate market. In addition, the plastic packaging segment has a strong potential to develop due to the growth of the food and beverage (F&B) industry, in particular the consumption of instant coffee (increased by 12.2% per year), candy confectionery (increased by 9% per year), sauce and spices (increased by 7.7% per year).

Meanwhile, the non-food industry has also experienced impressive growth over the past few years and promises in providing chances for the continuous growth in the plastic masterbatch industry. For example, these following sections including washing and cleaning detergent, skin-hair-body care products, surface cleaning solutions have a growth rate of 9-15%.

plastic masterbatch industry vietnam
Food and non-food industry growth in 2011-2016. Source: Stoxplus and EIU.

Products made of plastic masterbatch by Vietnamese manufacturers still lack the additional value

The two product lines with the largest proportion in the plastic masterbatch industry are the plastic packaging sector (39%) and plastic household appliances (29%) but these are also the two industries with the lowest added value. In contrast, the sector of technical resin compound although has high additional value but only accounts for 15% of the total share of the industry. The groups in which goods are made by technical plastic compound had a time when the accounted for up to 20% of the total industry structure but then this rate has decreased down to 15% in 2016.

According to The Development Strategy of Vietnamese plastic masterbatch industry in the period from 2011 to 2020 with vision to 2015 which was established by the Ministry of Industry and Trade’s, the plastic industry will restructure towards the movement in which the proportion of plastic packaging and plastic household products will be reduced, meanwhile the percentages’ of highly technical products like construction materials and engineering plastics which have special mechanical and physical properties and are used exclusively in construction and industrial activities are gradually increasing.

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Scale plastic industry in Vietnam by segment. Source: Stoxplus, VPA.

Domestic plastic masterbatch manufacturers are not independent in controlling the input materials

According to Vietnam Plastics Association (VPA), by 2016, Vietnamese plastic masterbatch industry needs about 5 million tons of materials including primary plastic, fillers, colorants and hundreds of additives every year, while domestic production can only provide about 900,000 tons of raw materials per year. According to data from the General Department of Vietnam Customs, in 2016 Vietnam has to import 4.54 million tons of plastic materials which worth nearly US $ 6.3 billion, increased by 15.7% compared to 2015.

From 2016 until now, the current situation of plastic masterbatch materials has not experienced any positive changes. Nghi Son refinery and petrochemical project is expected to start its operation in mid-2017 and produce more than 380 thousand tons of PP plastic according to investment certificates. However this project has been progressing slowly and is delayed until May 2018.

Dependence in material resources forces plastic masterbatch producers to take risks in the exchange rate and input costs

The dependence on imported plastic materials not only causes enterprises to stagnate their capital because they have to store raw materials for long period but this also compels various businesses in plastic masterbatch industries to take the risks causing by the fluctuation in average crude oil prices and the exchange rates between different currencies, especially the devaluation of VND against the US dollar. Whenever the VND / USD exchange rate increases, it will increase the input cost of plastic enterprises.

The cost of raw materials accounts for about 70-80% of the total cost spent for products, which makes it difficult for domestic enterprises to compete with other countries having the similar export products. Although an increase in exchange rate will have a positive impact on exports, however, this impact is not significantly benefit for Vietnamese plastic masterbatch industry because Vietnam is a plastic-trade-deficit economy with the estimated trade deficit in 2017 is more than USD 10 billion.

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Trade balance of Vietnam plastic industry, including plastic materials and plastic products. Source: Stoxplus, General Department of Customs.

>>Read more: Challenges for masterbatch manufacturing and packaging industry in Vietnam

Will domestic plastic masterbatch manufacturers gain benefits while the importing tariffs are increased?

The import duties on PP resin are increased from 0% to 1% from September 1st, 2016 and up to 3% from January 1st, 2017. According to VPA’s preliminary calculations, with an increase of 3% in import tariffs, the costs incurred which domestic firms have to pay for the foreign enterprises linking with Vietnam through the approved Free Trade Agreements (FTA) will be VND 1,870 billion in 2017.

According to the Ministry of Finance’s explanation in February 2017, PP resin is a petrochemical product which can be produced by domestic plastic masterbatch manufacturers so it is necessary to impose taxes in the imported PP plastic to encourage the development domestic goods.

More difficulties for plastic masterbatch companies since the increased importing tax on PP resin

According to the calculation of the Ministry of Finance at that time, Binh Son petrochemical refinery’s productivity is approximately 150,000 tons of PP resin per year, while Nghi Son refinery and petrochemical has its designed capacity of 400,000 tons per year, intended for the production of about 100,000 tons of PP resin in 2017, moving onwards to the target of production 300,000 tons per year in 2018. However, as mentioned above, Nghi Son oil refinery has been delayed and until April 2018, PP production at this factory has not yet been in the process as planned by the Ministry of Finance. Thus, domestic raw materials for plastic masterbatch production are still lacking while domestic plastic enterprises still have to pay high taxes when importing raw materials for their production.

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