POLYESTER STAPLE FIBRE

Potential for restructuring


By SHABBIR H. KAZMI
Oct 05 - 11, 1996

Summary

  • Total installed capacity expected to reach 400,000 tonnes per annum by 1997

  • Supply will outstrip demaand by almost 100,000 tonnes

  • Surplus can be utilized by the country's large spinning base

  • Local industry requires protection against dumping

The polyester staple fibre (PSF) industry in Pakistan, which started as an import substitution industry, after reaching the stage of fully meeting the local demand is heading towards surplus capacity. However, while looking at the local yarn spinning capacity it may be said that increase in supply over demand by 1997 can be avoided by major restructuring not only in the sector itself but also in yarn spinning.

To minimize the impact of globally declining prices, the government has already imposed regulatory duty on import of PSF. Commencement of commercial production by Dhan Fibres and Ibrahim Fibres has been delayed and the consumption of PSF has registered constant increase. Manufacturers are trying to control cost of production to arrest downward trend in profitability.

The last decade has registered a constant and massive increase in the demand for PSF not only in Pakistan but an equally fierce one on worldwide basis. Locally, the demand for man-made fibres has been propelled by uncertainties in the production of cotton. It has been said that successive shortfalls in the cotton crop were the main reason for greater use of synthetic fibres and the price surges have coerced the local spinners to switchover to more economical production of blended yarn(a mix between polyester and cotton). However, it is equally true that over the years there has been a gradual shift in consumer preference from 100% cotton fabric to blended fabric.

The gradual shift in consumer preference alongwith unprecedented increase in cotton prices has made production of blended fabric lucrative. The demand was further complemented by the declining prices of PSF globally during the last couple of years. Besides, blended yarn fetching higher price and better margins there are less stringent quota restrictions on it.

The growth of PSF industry in Pakistan has been parallel to the growth of cotton yarn manufacturing. The cotton yarn manufacturing capacity which took a quantum jump after the1991-92 bumper cotton crop, the installed number of spindles and rotors has increased. While the number of spindles increased from 5.569 million in 1990-91 to 8.7 million in 1994-95 the number of rotors also registered an increase from 75,000 to 135,000 in the corresponding period.

The country's first PSF manufacturing plant, National Fibres was established in 1982 as a public sector unit. Since then a cluster of similar projects have sprung to quench the demand for PSF through import substitution. The total consumption of PSF in Pakistan which was 18,000 tonnes in 1981 exceeded 149,000 tonnes in 1992 and touched nearly 200,00 tonnes in 1995.

CURRENT SCENARIO

Currently there are five manufacturing units in the country which will increase to seven with the advent of commercial production by Dhan Fibres and Ibrahim Fibres - the combined capacity of both these plants is 163,000 tonnes per annum. Dhan started trial production in the middle of 1996 - almost 12 months behind schedule, but the quality of fibre produced by the company was said to be much lower than the industry benchmark and Dhan is currently busy in making certain alterations in the plant. Ibrahim Fibres may also start its trial production by the middle of 1997. ICI Pakistan's expansion project is expected to commence production in November this year.

All the key players, Dewan Salman, ICI, Pakistan Synthetics, Rupali and National Fibres have been working above installed capacity. In 1994 collectively these units produced 133,171 tonnes of PSF as against an installed capacity of 110,500 tonnes. In spite of 1995 being a difficult year, increase in the price of PTA and MEG - two important and basic raw materials for PSF manufacturing - these units worked above installed capacity.

Dewan Salman and Pakistan Synthetics have already expanded their production capacities and ICI expansion project would be ready shortly. All these companies have undertaken major expansion programmes not only to increase the production capacity but also to achieve economies of scale - variables that will govern future success of these units as the competition is expected to get fiercer in the coming years.

While 1995 operations were characterised by increasing cost of PTA and MEG and declining trend in PSF prices globally, the government provided protection to the local manufacturers of PSF by imposing 30% regulatory duty on its import. The current year, 1996 is witnessing a massive decline in the prices of PTA and MEG which have been responsible for further fall in PSF prices. The prices of these two ingredients have gone down by more than 50% as compared to the prices prevailing in 1995.

International suppliers of PSF have correspondingly slashed their selling prices to around US$ one per kg forcing the local manufacturers to reduce their prices also. Fibre selling prices have declined from a high of Rs. 105 to Rs. 76 per kg. The local manufacturers are accusing the foreign suppliers of dumping. The situation demands serious efforts by the manufacturers to optimize the cost of production and thorough probe by the government to establish the fact of dumping.

GOVERNMENT POLICIES

The current fiscal and monetary policies of the government and anomalies are seriously impairing the profitability of local manufacturers. These include imposition of GST and non-withdrawal of 5% excise duty charged from the local manufacturers of PSF.

CARTEL FOR SURVIVAL

The PSF industry reaching near surplus capacity, facing globally declining prices and suspecting dumping by foreign suppliers, all the local manufacturers have been forced to join hands, in spite of being competitors. A 'fibre cartel' has emerged to combat the difficult conditions and decisions to adjust PSF prices, as and when required, are made collectively. It is expected that after due diligence the cartel may once again announce price reduction and the new price may be fixed around Rs. 60/kg. The manufacturers, as a group, are also demanding of the government to withdraw 5% excise duty on locally manufactured PSF and enhance regulatory duty on the import of polyester staple fibre.

KEY PLAYERS

The first evidence that PSF industry in Pakistan faces real difficult time came with Dewan Salman's half year 1995-96 results indicating nearly 73% decline in after tax profit which plunged to Rs. 113 million as compared to Rs. 419.97 million in the corresponding six months of 1994-95. Then came ICI Pakistan's operating loss of Rs. 23.8 million for its fibre division for the first half of 1996. Pakistan Synthetics, an erstwhile fibre manufacturer, announced a loss of Rs. 53.34 million for the six months' operation in 1996 confirming the apprehensions about the industry.

Dewan Salman, strategically located in the tax-exempted area of Hattar, which started PSF production with an installed capacity of 52,500 tonnes/annum has enhanced the total capacity to 108,500 tonnes/annum. Although unit 2 had commenced commercial production, reports indicate that neither unit 1 nor unit 2 are utilising the installed capacity fully evident from the decline in sales of the company.

Dewan group had announced plans for establishment a PTA plant in the country but reportedly the sponsors have decided not to go ahead with the project.

Dewan Salman has the advantage of sales tax exemption and a substantial in-house consumption of PSF but so far has not been able to redefine its sales strategy in the fast changing scenario.

According to Mustafa Mohsin, analyst at Khadim Ali Shah Bukhari & Co., Dewan Salman's sales tax exemption has put the company at a worrisome disadvantage. The recent budget has removed excise duty on yarn but levied 10% sales tax also payable on inputs. The customer, however, can partially offset the liability by presenting to the relevant tax authority an invoice of purchase which will qualify him for input credit. Since Dewan Salman does not pay sales tax on its PSF, its customers may not avail of any input credit. It is feared that the customers may switchover to other suppliers enabling them to obtain the input credit and thereby trim their costs.

It is also important to note that because of better documentation and transparency, export-oriented spinners are likely to receive the tax credit advantage as compared to locally-oriented spinners who are more prone to inefficient documentation.

With dwindling sales the company faces a dilemma but the options available are limited. Either it can reduce the selling price or forgo its sale tax exemptions - either way its profitability is bound to decline substantially. In the presence of cartel it is unlikely that the company can slash its prices without the rest doing the same. While relinquishing its sales tax exemption may be a bold step to maintain its current market share of PSF sales, surrendering its competitive edge may reverse its entire feasibility. It is feared that by doing so the company may post huge losses. The losses would not have been there had the prices of raw materials not fallen to the current level.

ICI Pakistan with present installed capacity of 19,000 tonnes/annum of PSF has undertaken a massive expansion project which will add another 63,000 tonnes/annum to its existing capacity. ICI's PTA plant at Port Qasim and polyester fibre plant will provide support to each other - PTA plant will ensure prompt and regular supply to fibre plant and PSF plant by consuming a bigger chunk of PTA produced in Pakistan. Global marketing network, existing brand loyalty in Pakistan and diversified product range give edge to ICI over all other players in the PSF industry.

Pakistan Synthetics having an installed capacity of to produce 15,000 tonnes of PSF has added 8,000 tonnes to enhance the total capacity to 23,000 tonnes per annum. The expansion project has already completed trial production but, considering the grim industry conditions, management has postponed commercial production of the additional capacity. The capacity underutilization of its initial installed plant during first half of 1996 was evident from over 16.6% decline in net sales. The plant worked at only 86% capacity. The decline in sale coupled with 26% increase in cost of goods sold resulted in massive reduction of gross margin which came down from over 31% for the last year to 3.4% during the period under review.

The other two plants namely Rupali and National Fibres each having a capacity to produce only 12,000 tonnes/annum of PSF have to remain contended with the residual sales. In the days to come both of them along with Pakistan Synthetics are expected to face very tough competition.

NEW ENTRANTS

The two units about to enter the arena, Dhan and Ibrahim have a huge capacity of 163,000 tonnes to add to the existing total capacity of 237,000 tonnes per annum (after taking into account expanded capacity of Pakistan Synthetics and ICI Pakistan). Therefore, the total capacity for PSF will be 400,000 tonnes per annum. Both the companies have an advantage of in-house consumption amounting to over 40% of their production.

The word 'Dhan' denotes wealth. This is precisely what numerous anxious investors have lost. The share price after touching a high of Rs. 18.5 (September'94) has pared to current disconcerting Rs. 3.5 level - shares were floated at premium. This is not all, the trial production was not satisfactory either. Yet people clasp their investment with the hope that this scrip will race to unprecedented heights.

The sponsors can rightly boast to have the second largest plant after Dewan Salman. Located in Hattar, it enjoys 5-year sales tax exemption from its set-up date. Turnkey contractors for designing and implementation of the plant was Tolaram of Singapore while a host of other European suppliers have supplied the equipment. Kohap of South Korea and Sabic of Saudi Arabia are the suppliers for PTA and MEG respectively.

Besides being a 100% equity-based company it has a lower per tonne capital cost as compared to Ibrahim Fibres. Dhan was launched at a time when the other fibre manufacturers were recording stellar financial performance, demand for PSF was surging at a compounded rate touching almost 24% with supply lagging far behind and cotton crop failure were regular. But before Dhan could come into operation the scenario has changed altogether. Expansion by existing fibre plants, announcement of Ibrahim Fibre, improvement in cotton supply and decline in PSF prices hang the future of company in balance.

Ibrahim Fibres yet another 100% equity-based PSF project has been sponsored by a group having major interest in textiles. The plant having a capacity to produce 70,000 fibre per annum has the advantage of versatile production. It is designed to allow two assembly lines capable of producing two different types of PSF. The project implies nominal financial charges and a good in-house demand for the product but by the time it commence commercial production there will be surplus PSF manufacturing capacity in the country. Market sources suspect that commencement of commercial production is being delayed but can the delay ensure better prospects? Maybe not. However, investors' frustration is evident from selling pressure and price decline of its shares quoted at stock exchanges.

STRATEGY FOR THE FUTURE

Inconsistent and non-coherent government policies, delay in decision-making, presence of pressure groups and political clout has already made the future of textile, sugar and cement industries bleak and PSF industry faces the same situation. The industry reaching near self-sufficiency and surplus production by 1997 needs prudent thinking and coherent and long-term polices to revitalize it.

The local manufacturers are justified in demanding of the government to make two prompt decisions: withdrawal of 5% excise duty on the locally produced PSF as there is no such corresponding duty on its import and enhancement of regulatory duty rate as dumping is suspected. The increase in regulatory duty should be for an interim period of one year during which efforts should be made to establish the fact of dumping by the foreign suppliers. Even under new WTO rules, the countries have a right to impose anti-dumping duties provided it is established, with substantial proof, that low prices fall under the purview of dumping. The imposition of regulatory duty would automatically make the imported PSF unattractive and will provide an opportunity to the local manufacturers for better capacity utilization.

At the level of manufacturing, companies must also optimize their cost of production by achieving economies of scale and cutting down expenses. In a scenario where the selling prices are determined by market forces, cost optimization is the only way to remain competitive.

On the marketing front, strategies for generating additional sales should be evolved by establishing closer liaison with local yarn manufacturers. As such Pakistan has over 8.7 million spindles and 135,000 rotors installed in over 500 spinning units and percentage of working spindles and rotors is less than 80%. If efforts are made to persuade the spinners to increase production of blended yarn, wherever possible, this can not only generate additional sales for the PSF manufacturers but also improve percentage of working spindles and rotors as well as ensure better returns for the spinners.

Production of polycotton yarn

Year             Quantity(in 000 Kgs)

1985-86         24,883

1986-87         25,935

1987-88         40,332

1988-89         67,863

1989-90         90,941

1990-91         109,850

1991-92         109,973

1992-93         81,621

1993-94         120,107

1994-95         135,314

Source: Office of Textile Commissioner

While looking at spinning sector it is evident that production of blended yarn has increased manifold over the years. The country produced 24.883 million kgs of ploycotton yarn in 1985-86 which increased to 135.314 million kgs in 1994-95. It also leads to the conclusion that since the number of spinning mills has risen from 160 to 446 during this period the newer mills are capable of producing blended yarn.

Production of blended fabric

Year         Quantity(in 000 sq. meters)

1985-86         31,870

1986-87         54,028

1987-88         61,136

1988-89         49,185

1989-90         47,223

1990-91         57,534

1991-92         66,256

1992-93         67,344

1993-94         59,835

1994-95         51,907

Source: Office of Textile Commissioner

Similarly, the data on weaving sector indicates that production of polycotton fabric which was less than 5 million sq. meters in 1977-78 touched a level of 67.344 million sq. meters in 1992-93 but declined in the subsequent years. One of the reasons for this reduction is attributed to increased demand of polycotton yarn by the knitting sector.

It may not be out of context to mention here that while the local manufacturers were complaining against the increase in PTA and MEG prices, the real impact on cost of production was much lower. Since most of the manufacturers have long-term contracts with suppliers the difference in spot and contract price had little relevance. However, a factor to watch will be the price of crude oil in the global markets. Since both PTA and MEG are crude-based products, the crude oil price movement in either direction is bound to reflect in the prices of these products.

In the prevailing circumstances the government has to step in to protect the billion dollar investment in the sector by removing excise duty as there is no similar duty on imported PSF. It is also demanded that the rate of regulatory duty should be enhanced till such time as dumping investigations are completed. But the manufacturers should also have to work hard to optimize cost of production, diversify product range and persuade the spinners to take the advantage of low cost PSF and produce more of blended yarn.