As it is, Gail has already started a three lakh tonne ethylene capacity - which would be used for producing the various polyethylene (PE) grades in the country.

Technically, one can substitute PP with PE in 30 per cent of applications and one would be preferred over the other, depending on the price. It would therefore be incorrect to present the demand-supply scenario of any one of these in isolation.

In India, the total demand was approximately five lakh tonnes of PP and 6.65 lakh tonnes of PE in 1997-98. Even considering a 20 per cent growth rate in PP and PE, we would require a maximum of 7.2 lakh tonnes of PP and 9.57 lakh tonnes of PE. However, the supply in PP would rise to more than nine lakh tonnes and that in PE would rise to similar levels after the start of the Gail plant.

This would result in lower selling pricesin the domestic market. Presently, the domestic prices are at a 5 per cent discount to international prices. The increase in domestic supply may depress this further.

But the silver lining is that the international prices of all the polymers are rising. This has been mainly due to the re-entry of the Chinese buyers in the Asian markets. The last one month has seen the prices of both polymers rising by more than 10 per cent.

Along with price rise, domestic players also get export incentives for importing equivalent of raw material -- naptha for Reliance and IPCL -- which effectively results in higher earnings for the company.

Obviously, if the international price hike is sustained one may see a larger proportion of exports from local players. This would also improve realisations of players in the country as some of production of local producers would not reach the domestic markets.

From the companies' point of view, both Reliance and Gail would get increased contributions due to higher sales volume andbecause of favourable cost structures.

For IPCL, the start of Gandhar phase-2 in the later part of year may not result in a better bottomline as there is a chance that the inadequate natural gas supply can see the company losing money in the polymer business.

The supply constraints of natural gas forces IPCL to use a combination of propane and butane in their cracker at Gandhar which results in lower yields and higher cost for production.