Risk Factors Quantitative and Qualitative Disclosures about Market Risk

- 30 - The cost of naphtha, the primary feedstock used to produce the Companys products, all of which the Company historically purchased from independent third parties, represented a substantial portion of the cost of goods sold of the Company, accounting for approximately 60.2 , 65.6 and 64.0 of the cost of goods sold of the Company for the years ended 31 December 2011 and 31 December 2012, and the six month period ended in 30 June 2013, respectively. The price of naphtha generally follows the price trend of the crude oil price and varies with the market conditions for crude oil. Naphtha price increase are not always of the same magnitude and direction as changes in the prices of the Companys products. As a result, increases in naphtha prices may have a material adverse effect on the Company’s margins and cash flows, to the extent that such increases are not passed through to the selling prices of the Companys products. Significant volatility in naphtha costs may also put pressure on margins of the Company, since sales price increases for the Company’s product may lag behind naphtha price increases. There can be no assurance that changes in naphtha prices will not always affect the business or results of operations of the Company in the future. Naphtha price increases may also increase the working capital required by the Company and, thus, may adversely affect the Companys liquidity and cash flow requirements. Currently, the Company does not enter into hedging agreements related to the prices of feedstock. No assurance can be given that in the future the Company will hedge any of its feedstock costs ot that any such hedges will have successful results. While naphtha is a globally-traded commodity and can be obtained from various sources, any major disruption in the global supply of would have a material adverse effect on the Companys operations. The Company currently purchases naphtha and other feedstocks from various sources, both in the spot market and through contracts that typically cover a one-year period and are renewable annually upon agreement of both parties. Approximately 27 of the Company’s total naphtha purchases in 2012 were made on a spot basis and were hence subject to market price movements. The MOPJ average spot pricec for naphtha per ton were US940 in 2011, US942 in 2012, and US908 for the six-month period ended on 30 June 2013. The highest and lowest spot prices for naphtha per ton were US1,096 and US827 in 2011, US1,088 and US698 in 2012, and US1,041 and US814 for the six-month period ended on 30 June 2013. In the event that the Company is required to purchase a greater proportion of feedstock in spot market, the cost of the Company ’s feedstock may become more volatile, and the Company may need to purchase naphtha at higher prices, which could have an adverse effect on the results of operations and cash flows of the Company. The Company currently manufactures all of the ethylene used by the Company as feedstock for production of polyethylene. However, the Company may need to import ethylene if the Company decides to run the polyethylene plant’s at higher rates of production, exposing the Company to fluctuations in price of ethylene in the global markets.  The Company may not be able to complete plans the Company’s capacity and product expansion plans for the Company’s existing and new products. The Company plans to expand its naphtha cracker production capacity to take advantage of the significant lack of supply of ethylene in Indonesia, which is expected to start operating in 2016. See Chapter VIII - Business Activities and Prospects - Plants Performance – Capacity and Plant Improvements . The Company expects to fund the expansion projects with the proceeds from the sales of securities and cash flows from operational activities. See Chapter II - Use of Proceeds. The Company anticipates that the Company will require approximately US380 million of capital expenditure for the expansion projects within 2013 to 2016. The Company cannot assure the investors that the capacity and product expansion plans of the Company will be successful or that such capacity and product expansion plans will be completed on schedule, or at all. The installation of new equipments and machineries necessary to achieve the Companys expansion plans involve a number of risks, any of which could give rise to delays or cost overruns, including the following: a. shortages, production delays, shipment or delivery delays or other availability issues related to the equipments or materials; b. unforeseen engineering, design or environmental problems; c. delays or other difficulties in obtaining required licenses or permits; or d. work stoppages, weather interferences, and other unanticipated cost increases. The Company s expansion plans may not be completed on schedule and within estimated cost. In addition, the Company’s management may be unable to successfully implement the expansion plans because management’s time and services will be shares among the expansion plans, and the normal duties related to the Company’s business. In addition, even if the Company successfully complete the expansion plan, there is no assurance that the Company would be able to utilize the increased production capacity as intended. Moreover, the Company may be unable to attract new customers to purchase products produced with the expanded capacity, and may be unable to develop and manage relationships with a broader network of suppliers around the world. If the Company is unable to successfully complete the expansion plans in a timely manner and at the expected cost, then the Company’s business, financial condition and results of operations may be materially and adversely affected.