POLYESTER STAPLE FIBRE INDUSTRY

An urgent need to enhance installed capacity

By SHABBIR H. KAZMI
Apr 10 - 16, 2000

It is, more or less, obvious that the worst period for polyester staple fibre (PSF) manufacturers in Pakistan is over. It is also evident that with capacity utilization touching close to designed capacities of individual units, there is an urgent need to expand PSF manufacturing facility. Even if one takes into account the additional capacity of 150,000 tonnes expected to come on line by third quarter of the year 2002, another expansion of a greater magnitude will be unavoidable in the year 2004.

The demand-supply gap has been gradually narrowing. The total current designed capacity of all the manufactures is around 400,000 tonnes per annum (tpa). The actual supply of PSF indicates only a marginal surplus mainly due to closure of National Fibre. Even the existing surplus will not be there after a while. Such a marginal surplus is a dangerous sign. If there is any unscheduled shut-down at any of the units, it can create serious interruptions in supply which is the most undesired situation.

Double-digit growth

Demand for PSF has been increasing at a three-year CAGR of 27 per cent. According to a report by Merrill Lynch, the main reasons for the rapid increase in demand for PSF in Pakistan are: inherent good qualities of the fibre, easy substitution over pure cotton and the premium fetched by blended yarn in the international markets. The report indicates that the demand growth for PSF over the last few years will surpass the local supply in the near future. Most of the units are already running at near full capacity and imports will be the only source to overcome demand-supply gap if expansion is not undertaken urgently.

According to sector experts some of the existing players are actively working on plans to increase installed capacity to take advantage of rapidly growing PSF demand. According to some these experts, Ibrahim Fibre seems to be ready to add another 150,000 tpa capacity to its existing 70,000 tpa plant located at Faisalabad. The impact of this proposed expansion is not likely materialize before third quarter of the year 2002, at the earliest.

The growth in demand for PSF, amongst other factors, has been mainly due to inconsistent cotton crops during last 3-5 years. Cotton output has remained flat over the last couple of years. Another fallout from poor cotton crop has been higher cotton prices — making cotton relatively more expensive as compared to PSF. This is evident from higher domestic prices of cotton and a decline in PSF prices.

With an anticipated bumper crop this season, estimated above 10 million bales, price of cotton is likely to remain low as compared to last year's average price. This is expected to enable the spinners to take advantage of inexpensive raw materials, both cotton and PSF. Greater availability and lower price of inputs can translate into higher capacity utilization, optimization of cost of production and improvisation of profit margin of the spinning units.

At the same time there has been efforts by a number of spinning units to shift from production of 100 per cent cotton yarn to blended yarn. This on going transition is expected to further increase demand for PSF. Cotton plays a very important role in the consumption trends of polyester products. PSF is an attractive substitute for cotton and also complement cotton through the production of blended yarn. This relationship has been fairly strong in the recent past.

Demand for blended yarn has increased, as cotton prices and supply have remained volatile. Production of blended yarn has been increasing constantly. Blended yarn is considered to be of a superior quality in Pakistan's main export markets compared to pure cotton yarn. This shift in international preference has compelled local producers to start catering to fresh demand. Thus, the product mix of yarn is seeing a radical shift towards blended yarn. Even until recent months, the demand for blended yarn has been on the increase despite the fact that international cotton prices weakened. Even today, cotton is available at a relatively lower price.

Another benefit of using PSF, for cash starved textile manufacturers, is the fact that they do not need to stock PSF like cotton which is a seasonal product and requires higher inventory level to be maintained. At the same time, it is unlikely that the government allows further exposure of financial institutions in textile sector. Therefore, a large number of spinners will prefer to use larger quantity of PSF which does not require a substantial investment in raw material inventory.

In the current budget, the government removed various provincial and local tax levies applicable across the country. With the removal of these charges the costs of certain companies are expected to go down. In addition to this, the practice of hindering the smooth running of transportation between PSF producers and the yarn manufacturers are being removed.

It should also be kept in mind that blended yarn usage in Pakistan is relatively low when compared with other countries in the region. This is evident from the fact that per capita consumption of PSF is 3 kg in the country, whereas India has a per capita consumption of 8 kg despite a lower per capita income. Developed countries like the US and Japan have a much higher per capita usage of 22 kg. The sector experts say that it is due to the climatic conditions of Pakistan. During the summer, high temperature and humid climate, the use of fabrics with higher PSF percentage is not preferred.

While many analysts believe that the PSF offtake will increase substantially in the future, some of the analysts express their concern regarding higher offtake of PSF as well as hike in its price. In the absence of any major imbalance in supply and demand, the recent increase in PSF price has been termed an outcome of the efforts of manufacturers' cartel, stockpiling and natural impact of inflationary trend.

Duty structure

The government, succumbing to pressure exerted by spinners, has included PSF in no duty and rebate scheme. However, the real beneficiaries of this policy will mainly be the large export units which can take advantage of the situation and import cheap PSF. As such the import of PSF has been on a constant decline for the last several years due to enhanced availability of the locally produced fibre. Some analysts say that the import is only of those specifications which are not produced in the country.

At the same time, responding to the claim of local PSF manufacturers accusing dumping by regional PSF producers, the government has imposed regulatory duty on the imported PSF. Although, this is a reassuring step, the main onus falls on the authorities to actually check and stop dumping. With the textile lobby having considerable clout in policy matters, the actual benefit to local PSF manufacturers remains yet to be seen.

The government also imposed a 15 per cent duty on the import of cotton due to the recent weakening of international cotton prices. The move translated into higher price of cotton in the domestic market which allowed the local PSF manufacturers to increase price of indigenous fibre. However, it proved to be a very short-term measure.

With the dismissal of the previous government the new administration removed all import duties on cotton and pegged the price of local cotton to international prices. This caused local prices to drop to record lows due to the severity of the situation. In the meantime it also became evident that there was a shortage of cotton globally. And the price of cotton improved in the domestic market.

Global overview

The PSF industry has seen volatility in the last few years. After the onset of the Asian crisis, overall economic activity in Far East Asian countries came to a grinding halt. This inundated local economies with massive surpluses in all manufacturing sectors. With a sharp decline in economic activities, the PSF manufacturers were no exception.

This economic crisis was a turning point for the economies of the Asian region. With the drop in demand, larger producers were compelled to lower their capacity utilization and under-price their competitors across the board. This resulted in a fall of PSF prices in the region in particular and globally in general. With imports becoming cheaper there was a pressure on PSF manufacturers in Pakistan to curtail their prices.

Turnaround

Despite all the odds the sector is visibly experiencing a turnaround. Capacity utilization and profit margins have improved and PSF prices been firming up. However, some of the analysts believe that the turnaround may not be sustainable. The main reasons for this apprehension are: the increase in PSF price is largely cost-pushed and the recent increase in PSF offtake is due to stockpiling by local spinners in anticipation of increase in cotton price. At the same time regional demand is likely to remain depressed keeping local prices under pressure. Historic trends clearly indicate that local PSF prices follow regional movements.

Inputs price

The increase in oil prices had a corresponding effect on paraxylene prices. Due to the fact that the prices of paraxylene and PTA are highly correlated, a surge in PTA prices was directly attributed to an increase in paraxylene prices across the region, which resulted in an increase in PTA prices in Pakistan as well.

Adding to this upsurge in PTA price was the shutdown of some of the large PTA units in Asia — from Karachi to Tokyo. With production nearly halved, the subsequent increase in PTA prices was a foregone conclusion. However, analysts wonder whether these shutdowns were deliberately timed in such a manner to decrease supply or the fact that these units were not closed down for the scheduled maintenance. Whatever, may be the reasons, the closure was an appropriate step in the given conditions.

Even the only local producer of PTA, ICI Pakistan, closed its plant in May 1999. While some sector experts term it synchronization with regional players, others consider this a coincidence. However, the cut down in production resulted in margin in PTA business for the Company.

Local industry vs region

This was evident when Asia was glutted with PSF there was a robust demand in Pakistan. At the same time the price of fibre was hitting bottom. The situation has changed lately primarily due to firmer raw material prices as well as some level of demand being stimulated with the recovery of Far Eastern economies.

In Pakistan, the major news is the takeover of Dhan Fibres by Dewan Salman. This almost doubles Dewan's position to around 200,000 tpa or nearly 38 per cent share in the local market. This may put others at ease as Dewan may not go for adding new capacity for a reasonable time.

In the recent budget in India, duties on man-made fibres were reduced. However, the basic duty on fibre intermediates remains unchanged. The resulting anomally means that customs duty on polyester raw materials is higher as compared to polyester staple and filament.

According to Merrill Lynch report, China has come down hard on illegal imports of PSF from Asian producers. China forms the better part of PSF consumption in the region. This is likely to add to the supply overhang, with regional producers compelled to cut production by 50 to 60 per cent to reduce build-up of inventories. Even with these cuts, the supply overhang is likely to cause some price weakening. For the Asian producers, demand is likely to be short-lived. Sustained demand growth leading to firmer PSF prices will only come through increased offtake rather than limiting supply through production cuts.

Key Players

Dewan Salman Fibre is the largest PSF producer in the country. With an installed capacity of 108,500 tpa it accounts for 38 per cent of total installed capacity it is the prime supplier of PSF for export-oriented textile units. Dewan is a tripartite venture — Dewan Mushtaq group, Mitsubishi Corporation of Japan and Samyang of Korea. It has recently started production of acrylic fibre. While the installed capacity is 25,000 tpa the estimated demand for acrylic fibre in the country is estimated around 35,000 tpa. Gross margin for the Company is likely to ease up with the commencement of acrylic fibre production. Despite the higher margin associated with acrylic business, the Company may not be able to see overall increase primarily due to debt burden.

Dhan Fibres is the second largest PSF producer in Pakistan with an installed capacity of 90,000 tpa. The Company has not been able to achieve optimum capacity utilization despite having relatively newer plant. Following the commencement of commercial operations a series of technological problems, its PSF was sold at a discount. However, with the takeover of management control by Dewan group, most of these problems are expected to be resolved. An important point to note is that Dhan is no longer a 100 per cent equity based company. However, over the years, due to regular and substantial borrowings debt burden has been increasing.

Ibrahim Fibres is the third largest PSF manufacturer with an installed capacity of 70,000 tpa. Bulk of the fibre produced consist of semi-dull variety mostly used by the local spinners. One of the key advantages for the Company is its proximity to the largest number of yarn producers. Any increase in production of blended yarn has a positive impact on its sales. In addition it enjoys a large in-house consumption of PSF. The fibre produced by Ibrahim is often sold at premium due to its superior quality. According to reports plant capacity is being increased by another 150,000 tpa expected to come on line by third quarter of the year 2002.

ICI Pakistan has an installed capacity of 50,500 tpa. However, over the last couple of years it has been able to achieve production above the designed capacity. The Company has also established the first ever PTA plant in Pakistan. Following unprecedented lows in PTA margins the Company posted huge losses. The situation has improved as the loss from PTA business during the year 1999 was less than the loss incurred during six month of the year 1998. However, both PTA price and margin, are expected to improve for the year 2000.

Outlook

The sector experts strongly believe that with the takeover of Dhan by Dewan Slaman, there will be not only improvement in quality of fibre produced at Dhan facility but there will also be improvement in capacity utilization.

As the robust demand for PSF is expected to continue in Pakistan, there is a need for expansion in installed capacity with regular intervals. Not only that it will add value to local production of textiles and clothing but will also enhance Pakistan's export proceeds.

With the decline in crude oil price, PTA and MEG prices are also expected to go down. At the same time the probability of dumping by PSF manufacturers in the region is also not expected to continue due to higher offtake by major PSF buying countries. Therefore, it is necessary to review continuation of regulatory duty on PSF in the forthcoming budget.

Some sector experts believe that now it is an appropriate time for product diversification and specialization. Smaller units should go for specialty items rather than producing the normal product range.

There is also an urgent need to restart National Fibre. Its closure for a long period is not only a national loss but also a challenge for those who still wish to expand their market share.