Does Titan's profit depends on oil price?

Some analysts worried about the profitability of Titan due to the rising oil price. On the other hand, the Titan's management always claimed that the company's profit doesn't affected by oil price, but the supply-demand condition of plastics which will determine the polymer-naphtha margin (the price spread between its product and feedstock).

To check whether the management's statement is true, I've done some research on the historical naphtha price, polymer price, and crude oil price. The following chart show the relationship between polyethylene-naphtha margin and oil price from Jan-2004 to Nov-2007:

source: http://www.plastemart.com/

* The prices shown above are international prices in our region. The exact prices of Titan's may not be the same as the above, but shouldn't be much different (within 5%).

From the graph, we can see that the oil price has been rising from about USD$30 to about USD$90 per barrel during this period. Naphtha price moved exactly in the same trend. Polyethylene's price also changed in similar way, but sometimes experienced a time-lag of 1~3 months. When this happened, the PE-naphtha spread will temporarily move in the opposite direction to the oil price, then will back to the normal level when the PE price catch-up with naphtha.

(Example: during Sep~Nov-2006, the oil price dropped from $80 to $60, the PE-naphtha margin temporarily up from $650 to $850 per tonnes. During Jan~May-2007, the PE-naphtha spread drop from $800 to $600 while the oil price rise from $65 to $85.)

As a whole, although there's some short-term volatility, the average PE-naphtha spread remain quite stable during 2004 to 2007, while the oil price has risen for almost 200%. In fact, it showed a slightly upwards trend during this period.

So, it's quite clear that the profitability of Titan doesn't affected by the rising oil price. Instead, Titan's profit is highly depend on the Polymer-naphtha margin, which in-turn depend on the demand-supply condition of plastic market. Seeing that the world's polymer capacity is growing with a slower rate than the demand for plastics, the outlook for polymer-naphtha margin will be quite positive in the near future.

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[updated 29/10/2008]: Those who interested to view the more updated version of the polymer-naphtha-spread chart , please visit here. In the document, I had also included a worksheet showing the correlation between oil price and Titan's quaterly report. I'll update the document from time to time.

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