continue to pressurize margins
PSF demand remains robust due to higher prices of
locally produced cotton
By SHABBIR H. KAZMI
May 21 - Jun 03, 2001
Polyester staple fibres (PSF) demand continues to
remain robust due to higher prices of locally produced cotton. This
trend is likely to keep PSF demand growing by 10 per cent in 2001.
While cotton prices have come down marginally they are still higher
and encourage spinners to use more PSF. Prices of locally produced PSF
are close to international prices of the commodity. International
prices of PSF have come down considerably — from 90 cents to 75
cents per kilogram. Analysts attribute this reduction to lower offtake
There is a forecast for reduction in margins of
local PSF manufacturers. While prices of man-made fibre is at the
level of previous year, prices of two major inputs namely PTA and MEG
have registered hike in last couple of months. It will be interesting
to watch the performance of the key players in the coming months. In
the cartel of PSF manufacturers two companies namely Ibrahim Fibres
and Dewan Salman Fibres have virtually attained the power to determine
price. Ibrahim's power will increase further after its expanded
capacity commence production in mid 2002.
In the past PSF was considered a substitute for
cotton. However, with the enhanced capabilities of local spinners to
produce blended yarn, PSF complements cotton and its demand is growing
around 10 per cent. Analysts say that enhanced production of PSF has
been absorbed by the local spinners and additional supply will create
its own demand. Their forecast is based on the fact that nearly US$
750 million is being invested in spinning to add higher value to yarn
produced in the country.
Ibrahim Fibres has reported a positive earnings
surprise for the year 2000 by posting an EPS of Rs 2.85. Phenomenal
earnings have proved the fact that companies with strong fundamentals
are capable of capturing the full advantage of positive sector
dynamics. The unit is already operating at full capacity utilization.
Therefore, further increase in volume is not possible despite a
forecast for 10 per cent increase in demand. However, to improve its
margin, management is following innovative policies. The Company is
expected to emerge stronger due to increase in capacity by 200 per
cent and enjoying a very large in-house consumption.
Dewan Salman Fibres has shown a significant
improvement due to strong demand and overall improvement in conversion
margins. Despite higher financial charges profit before tax improved.
However, further analysis reveals that the Company despite currently
being 180 per cent larger in capacity terms than Ibrahim has to
improve its operational effectiveness. The margin comparison shows
that right from conversion margin to the EBIT Ibrahim seems to be
providing superior return than Dewan Salman. However, the hidden
factor is not any operational inefficiency but the burden of initial
losses to Dewan Salman's acrylic plant that has depressed its earnings
for the year 2000. The Company is expected to higher volume of sales
and reduce its financial burden and improve its cashflow in the coming
ICI Pakistan is currently undergoing the
process of demerger. The segregation of PTA business from other
divisions is expected to improve the profitability of ICI Pakistan
(non-PTA). Analysts say that profit of PTA business is also expected
to improve mainly due to higher capacity utilization of the plant.
This forecast is based on the prevailing prices of locally produced
PSF which are close to international prices of the commodity.
The robust demand for PSF and higher capacity
utilization at local units have helped in achieving economies of
scale. While the input cost are expected to go up, operational
efficiency, quality standards and in-house consumption will play the
key role in determining profit margins of the companies. Ibrahim and
Dewan Salman will continue to play a lead role among the PSF cartel
— on the basis of their installed capacity. Both the companies are
trying hard to improve quality of finished products. They also enjoy a
large in-house demand for PSF.
National Fibres Limited (NFL) is a small unit and
virtually closed since June last year. Habib Bank Limited (HBL) has
lately executed decree granted in its favour. It is yet to be seen how
and when HBL or Corporate and Industrial Restructuring Corporation
(CIRC) will sell the unit. NFL was closed due to the failure of
National Development Finance Corporation (NDFC) which was given
management control of NFL by the court about 30 months back. Nearly
1000 workers are getting half the salary since the lay-off announced
in June 2000. Closure of NFL is not only a criminal waste of national
resources but more importantly financial assassination of 1000
employees of the company.