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It is likely that price-cutting may take place among the local manufacturers

By SAAD HASHEMY
May 20 -June 02, 2002

Two of the key local Polyester Staple Fiber (PSF) players, Ibrahim Fibres and ICI Pakistan, have undergone major expansions. Ibrahim Fibres expansion is expected by June while ICI Pakistan's extended capacity has started production. The key concern remains as to whether these expansions would lead to a capacity overhang and an eventual price war among the local PSF manufacturers.

The current PSF sector capacity of the country is around 400,000 tonnes/annum with Dewan Salman being the largest player. Dewan Salman acquired Dhan Fibres in June 2000 and combined capacity came close 200,000 tonnes. Since then, Dewan has been undergoing de-bottlenecking and within one year increased its capacity to 225,000 tonnes by June 2001.

The other two key players are Ibrahim Fibres and ICI both of whom have undergone capacity expansions recently. Their capacities after the expansions are expected at around, 210,000 tonnes for Ibrahim and 120,000 tonnes for ICI. Taking into account these expansions, the overall capacity of the industry would touch 580,000 tonnes.

During the year 2001, the total demand for PSF was around 430,000 tonnes. This is expected to be up to 460,000 tonnes during the current year. The reason for this increase is buoyant demand from the textile sector on the back of improvement in textile orders from March 2002 onwards. This comes as an upturn in the US economy witnessed recently. The US economy after a dismal 2001 has seen some rebound in the first quarter of the current calendar year. This rebound has translated into increased demand of Pakistan's exports, which mainly includes textiles.

Furthermore, it should be noted that the much adversities in exports expected post 9/11 never realized as textile exports upto the year to date have failed to show much weakness. This again could be due to a positive outlook on the US economy. Overall, exports for the current financial year are expected at US$ 9 billion, more or less in line with total exports achieved in last fiscal year.

Despite the above buoyancy in demand for PSF, the quantum of expansion of the PSF sector will likely remain in excess of demand. Assuming that 460,000 tonnes of demand is realized during the current year and that the demand further increases by a modest 5 to 10 per cent in next year, there will still be excess capacity of 50,000 to 75,000 tonnes in the country.

At present, the local PSF manufacturers work under the ambit of a Cartel under which, taking into account import prices of PSF, price of locally produced PSF is fixed. Recently, an upwards trend has been witnessed in global prices of primary petrochemical commodities. On the back of rising global PSF prices, local PSF prices have also been on an increase. Although, the input costs of raw materials have also been rising, the rise in PSF prices has been positive for the local PSF players as these usually maintain a 60-day raw material inventory level.

Given the capacity overhang, it is likely that this Cartel may collapse and price-cutting may take place among the local manufacturers. Some signs of a price war emerged last year when one of the local manufacturers going for capacity expansion started soft marketing its product to clients of another manufacturer. This led to a brief outage of the Cartel but the rift was soon resolved. The incident, however, gave a glimpse as to what may be the situation once all expansions come online and manufacturers gear up to sell their excess products. This will impede the local industry's margins thus adversely affecting their profitability.

Another situation could be that the local PSF players under utilize their capacities and produce a specific quota, as is the case of the cement industry where capacity utilization of cement plants is around 60 to 65 per cent. A local PSF industry source was of the view that such a step may indeed be taken, as there is simply no other option. Exports, at present, have hardly realized much. Industry sources believe that there may be some potential for exports if global prices continue their rising trend.

The above undercutting of capacity may continue until demand of PSF from the textile industry picks up. Given the ongoing expansions in the local textile industry, it is expected that the surplus will likely find its way in the local market in the coming years. Local textile mills are aggressively increasing their output both in terms of quantity and quality to ensure their competitiveness in the global market.

The writer is Head of Research at IP Securities