. .



PSF Sector
Cyclical dip 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 by China.

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.

Key players

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 years.

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.

Outlook

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.