STAPLE FIBRE INDUSTRY
An urgent need to enhance installed capacity
By SHABBIR H.
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.
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
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.
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
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.
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
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.
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.
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
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.
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.