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