Ibrahim Fibres has the potential to expand its capacity at optimum
By SHABBIR H. KAZMI
August 16 - 22, 1999
Lately capacity utilization of local polyester staple fibre (PSF)
manufacturers has improved. It is the result of increased demand by local spinners and
upward trend in the prices of fibre in the international markets. While the profit margin
of all the local PSF manufacturers in the country is expected to improve, Ibrahim Fibres
seems to be the only company capable of expanding the installed capacity. The industry
sources say that the Company has already prepared the blue print to double its capacity
and plans to commence commercial production by year 2002.
Till recently the industry was suffering, due to capacity under
utilization, downward trend in PSF prices and alleged dumping by Far Eastern manufacturers
on account of global glut of supply. With the beginning of 1999 the offtake by local
spinners has improved, prices have gone up and international prices are also on continuous
increase. Prices of PSF in the international market are linked with the price of crude oil
which has also registered an upward trend lately. As a result, from a low of 60 cents in
March, prices have moved to over 85 cents per kg. Domestic prices which closely track
international prices have jumped from Rs. 50 per kg in November last year to Rs 62 per kg
in July this year.
The last few months have seen an improvement in PTA prices which have
moved from a low of US$ 300 per tonne in February to US$ 450 per tonne upto July this
year. However, further increase in PTA prices is not expected as the demand/supply
scenario is still not favourable and supply pressure will continue to cap prices. At the
same time MEG prices have reached US$ 475 per tonne in June this year. Prices of MEG are
expected to continue to increase till new facilities start commercial production by the
According to the recent estimates the domestic annual demand has
exceeded 320,000 tonnes. Whereas the production capacity has remained flat at 310,000
since 1996. Therefore, a need has been felt that PSF production capacity in the country
should be expanded. At present ICI Pakistan is engrossed in its own problems, mainly due
to massive losses of PTA facility. Dewan Salman has decided to diversify into production
of acrylic fibre and no other manufacturer, except Ibrahim Fibre, enjoys better
fundamentals to expand its capacity.
The key factors, affecting earnings of domestic PSF manufacturers, have
been alleged dumping. However, approval of anti-dumping law by the National Assembly has
paved way for the imposition of regulatory duty. On the other hand PSF has been included
in the list of 'No duty No Drawback' items. Therefore, prices will continue to play a
vital role in the selection of origin of PSF. However, the preference for imported PSF may
not be there because international prices of fibre have been on a constant increase.
Ibrahim Fibre has the advantage of location in the heart of textile
industry Faisalabad. It also enjoys low financial cost and large consumption of PSF
by the Group. Despite the fact that 1998 was a bad year, the Company was able to achieve
94 per cent capacity utilization. The range of production is also diversified, both in
terms of brightness and denier.
The Company is equity based with a paid-up capital of Rs 2 billion and
shareholders equity of over Rs 3 billion. The long-term loans as on September 30, 1998
were Rs 528 million only. Financial charges were Rs 136 million for the whole year.
Therefore, it may be said that all the fundamentals are in favour of Ibrahim Fibre to go
for an expansion. Doubling of installed capacity seems more appropriate.
Two factors, equity base and declining interest rates, suggest that the
Company should finance its expansion project through debt rather than increasing capital
base. According to some analysts, current debt equity ratio suggests that the Company
should be able to borrow at the most competitive rate. However, some analysts still
suggest that financing through equity increase will be more appropriate as the Company
will not be obliged to pay any dividend as against financial charges on borrowing.
Apparently this philosophy may not work as it may dilute the shareholding of present
The earnings of the sector are expected to improve further and demand
surpassing local supply, requires that additional capacity should be installed at the
earliest. The availability of locally produced cotton is still not predictable. Therefore,
spinners need to avail the advantage of local supply of PSF. The central bank has planned
private sector credit expansion at Rs 119 billion for the current year, money market is
too liquid and lending rates are low. Therefore, all the PSF manufacturers must examine
expansion project. The government should also encourage such an expansion to facilitate
better capacity of Pakistan's only PTA plant.