The persistent hike in crude oil prices has led to
substantial rise in the prices of two basic major raw material, PTA and
MEG, for polyester staple fibre industry globally. The increase in the
raw material prices left no option with the local manufacturers of PSF
but to increase its price. The ever-strong textile lobby has strongly
criticized the move of PSF manufacturers. Can the manufacturers be
blamed for the hike? Or, is this a temporary phenomenon that the
spinners have to live with, till the Iraq crisis is resolved amicably?
Cotton prices in the domestic market have registered
an upward trend, partly due to contradictory estimates of cotton output
in the country and, partly, due to forecast of a potential shortfall in
cotton production globally. Textile spinners fear that they will not be
able to pass on the increase in cost of cotton and any increase in PSF
prices will further erode their margins and result in possible losses.
The rupee appreciation against dollar has already started affecting
adversely profit margins of exporters of textiles and clothing.
Therefore, there is a need to examine the situation dispassionately and
evolve a strategy that can be beneficial for all the stakeholders.
The PSF industry has been constantly making
substantial investment to bring its operations to international level.
ICI Pakistan established its PSF unit, having the capacity to produce
12,000 tonnes fibre per annum, in 1982. Lately, the installed capacity
grew to about 600,000 tonnes per annum due to establishment of new units
and expansions by the existing units. At present, Ibrahim Fibres, Dewan
Salman Fibre and ICI Pakistan control bulk of the capacity. Dhan Fibre
has been taken over and merged into Dewan Salman Fibre. ICI Pakistan has
also established a manufacturing PTA plant near Karachi. National Fibres,
a unit established in the public sector and later on privatized, has
been remained for almost three years.
According to a PSF sector expert, "The GoP's
decision to allow establishment of PSF units in the country was aimed at
achieving self-sufficiency of a product that uses two major inputs
derived from crude oil. Since the units proposed by the local investors
were smaller in size as compared to the units operating globally,
various incentives were also made available to the sponsors. The GoP
policy yielded results and massive investment had been made in the
sector over the last twenty years. The need for protection has always
been there due to cyclic movement of PSF prices. It become even more
pressing at times when overseas PSF manufacturers dump their products in
The textile lobby has always criticized the
protection policy for PSF industry. Lately, the spinners have been
demanding that PSF should be included in the Duty and Tax Remission for
Export (DTRE) scheme. After the recent increase in PSF prices by the
local manufacturers, they have once again raised this demand. To ensure
greater competition with the overseas suppliers, the GoP has reduced the
effective protection of PSF manufacturers by reducing duty on PSF from
25% to 20% in the current budget.
According to an equities analyst, "The logic
being followed by the spinners negates their own demand for protection
of textile industry. They have thrived during the last five decades
mainly due to the protection. If one accepts their point of view, then
there was no justification for imposition of restriction on import of
cotton yarn and fabrics into Pakistan. If the policy of protecting the
textile industry was right, protection to PSF manufacturers is also
Therefore, to face the current situation, it is
necessary that all the stakeholders must recognize the fact that the
cotton prices are expected to remain high due to potential shortfall in
its supply globally, Pakistan cannot be an exception. Similarly, unless
crude oil prices come down, any reduction in PSF prices should not be
expected. If the hike in cotton and PSF prices in universal, the hike in
the prices of textiles and clothing is also inevitable. Saying this, one
must also keep in mind that it will not be easy for the local exporters
to negotiate higher price for the already signed export orders, they may
succeed in acquiring new orders at higher prices.
According to a textile sector expert, "Instead
of asking the GoP to make changes in its policies, the spinning mills
should first of all put their house in order and learn to live without
crutches of government support. Many units can improve their
profitability by following good manufacturing practices." According
to him, the local manufacturers of textiles and clothing should exercise
better cost controls. Attaining higher production and productivity can
help in optimizing cost of production. Inefficiency and wastage have to
be minimized. Improvement in quality and greater value addition can also
help in higher unit price realization.
The sector analysts say, "Gone are the days when
PSF was considered a substitute for cotton, at present PSF complements
cotton." The consumption of PSF in Pakistan has reached the present
level only because a large number of spinning units deemed production of
blended yarn a more lucrative business. The gradual switchover was
facilitated only because of availability of locally produced PSF at
competitive prices. The current hike in PSF prices is due to external
factors and affecting all the producers of textiles and clothing
globally, local industry is not the only exception.
Ever since the import duty on PSF is reduced, the
local manufacturers have been saying, "The duty structure in
Pakistan does not fully support PSF manufacturing in the country."
To be able to make a prudent decision, economic managers of Pakistan
must not ignore their outcry. The fact is that the GoP reduced the
import duty on PSF but did not make any corresponding reduction in
import duty on PTA and MEG. The GoP had retained import duty on PTA and
MEG at 15% and 10% respectively. Therefore, the PSF manufacturers are
right in demanding that import duty on PTA and MEG should have been
It is believed that the GoP was not in a position to
reduce duty on PTA due to the understanding reached by the sponsors of
Pakistan PTA Limited. A huge investment has been made for the local
production of PTA but the unit has been incurring losses, ever since it
commenced operations. The local manufacturer had expressed that any
reduction in import duty on PTA would only add to the losses of the
company, foreign investors hold at least 25% of the total paid up
capital of Pakistan PTA Limited. However, the decision for not to reduce
the import duty on MEG remains questionable. Theoretically, any raw
material that is not produced locally should not be liable to payment of
more than 5% import duty. Therefore, then GoP must reduce the import
duty on MEG immediately.
ICI Pakistan has a 25% shareholding in Pakistan PTA
Limited, which is also an ICP Plc subsidiary. The PTA business was set
up in 1995 within ICI Pakistan and a US$ 490 million PTA manufacturing
facility at Port Qasim, near Karachi, was commissioned in 1998. In 2001,
the PTA business was demerged and housed in Pakistan PTA Limited. The
company has shown a 12% growth in its sales for the year ending December
31, 2001, an increase from Rs 12.53 billion in year 2001 to Rs 14.09
billion for the year 2002. This increase can be attributed to the
improvement in the demand and short supply of PTA in the Asian region
due to shutdown of various plants in Korea, Taiwan and Malaysia. The
company posted Rs 2.467 billion loss before tax for the year 2002 as
compared to a loss of Rs 4.536 billion for the previous year.
ICI Pakistan pioneered PSF technology in Pakistan
through investment in a 12,000 tonnes per annum plant in 1982 near
Lahore. Successive expansions and de-bottleneckings in the late 1980s
and a major expansion in 1996, costing US$ 100 million was made to
ensure its strong position in the industry. The plant achieved record
production, for the third consecutive year in 2001, at 72,911 tonnes.
The ISO-902 certified PSF plant delivers quality to meet the tough
challenge. ICI Pakistan's PSF plant is the only PSF plant in the country
equipped with an effluent treatment plant and meets the National
Environmental Quality Standards. Financial results for the year ending
December 31, 2002 show considerable improvement over previous year. The
improvement was mainly due to improved performance of PSF unit as well
as better cost controls at Soda Ash units. However, performance of PSF
unit, on quarterly basis, remained erratic due to volatility of price of
raw materials as well finished product.
DEWAN SALMAN FIBRE
After the merger of Dhan Fibre, the company enjoys
the largest in the total installed capacity for manufacturing PSF. The
company produces PSF at two units. The output from 143,500 tonnes/annum
plant is taxable and output from 56,000 tonnes/annum plant is tax
exempt. The company also operates a 25,000 tonnes/annum acrylic yarn
producing facility. Sales for the year ending June 30, 2002 were more or
less at the level of previous year. However, profit before tax for the
year 2002 went down drastically due to the hike in financial charges,
going up from Rs 1,047.9 million to Rs 1,339.6 million. The EPS also
plunged from Rs 1.85 for the year 2001 to Rs 0.93 for the year 2002. The
company also did not declare any dividend since year the 2000 but issued
The company has expanded its installed capacity to
produce 138,000 tonnes of PSF annually. It enjoys two advantages over
its competitors, 1) location and 2) lower production cost. The unit is
located in Faisalabad, the hub of textile industry. The cost of fibre
produced at Ibrahim is believed to be at least Rs 2/kg lower than its
competitors. The company also enjoys substantial offtake of PSF by
associate companies. The group controls three textile mills with a total
spinning capacity of over 136,000 spindles. While other PSF are aiming
overseas market, Ibrahim intends to continue to cater the domestic
market. Sales of the company registered a 9% decline despite increase in
quantum of PSF sold. The factors attributable to the decline are: rising
cost of raw material, PSF price volatility and reduction in the
protection level to the industry from 8.5% to 3.5% in the federal budget
2002-03. Though, gross profit for year 2002 was 26% lower as compared to
previous year, the company registered an improvement in its bottom line
by 12% compared to previous year. The Board of Directors approved
distribution of 15% dividend to the shareholders.
CURRENT OVER SUPPLY
With the expanded capacity of Ibrahim Fibres and ICI
Pakistan coming on line and better capacity utilization of Dhan Fibre
(now merged with Dewan Salman), the supply of PSF exceeds demand. At one
stage it looked that price war was about to start. However, lately the
manufacturer, who has been selling its product Rs 2/kg lower than the
going rate, also joined hands. Therefore, all the manufacturers
succeeded in raising the price by Rs 10/kg. However, some analysts
believe that this oversupply is a temporary phenomenon. With more
spindles coming online, in due course, the average capacity utilization
of the PSF sector is expected to improve further.
Some manufacturers have already started producing
specialty fibre. They aim to achieve twin objectives, avoiding cutthroat
competition in regular fibre and earning premium on specialty fibre.
However, some sector analysts believe that the quantum of specialty
fibre is very small as compared to total installed capacity for PSF
manufacturing. Besides, due to small order size, frequent changes have
to be made in the production line.
EXPORT OF PSF
During year 2001-02 Dewan Salman managed to export
PSF to Italy, France and Syria. The company has succeeded in obtaining
repeat order. It will be exporting 2,000 tonnes PSF per month. The
export orders are expected to improve overall capacity utilization and
help in achieving greater production efficiencies.
Central Board of Revenue has allowed repayment of
custom duties against export of PSF at the rate of Rs 5.37 per kg.
According to industry sources this facility is inadequate to support
efforts of Pakistani exporters to compete in the global markets.
Overseas PSF producers enjoy substantial advantage given the
efficiencies of integrated upstream industries as well as lower
financial, utility, infrastructure and freight costs.
According to the latest report by ICAC, world cotton
consumption in 2002-03 is expected to grow by 3% over the last year as
global demand for textiles and clothing continues to rise. As against
this, world cotton output is expected to be lower by 10% hinting towards
a potential shortage. While cotton output in Pakistan is estimated
around 10 million bales, spinners indicate their requirement above 11.5
million bales, indicating a potential shortfall of 1.5 million to 2
million bales. The fear of potential shortfall has already started
pushing cotton prices up in the domestic market.
The Iraq crisis does not seem to be ending; rather
clouds of war are getting thicker. It seems that the US has decided to
get control over the oil supply of Iraq. Unless the situation is back to
normal in the Middle East, prices of PTA and MEG are expected to remain
high. Going forward the profitability of local PSF manufacturers can
only be insured if they remain united in fixing the PSF prices. With
Ibrahim Fibre joining the cartel the probability of price war seems to
The local manufacturers have started export of PSF.
This is expected to improve capacity utilization and achieve higher
economies of scale. However, the GoP must help them in by enhancing the
rebate. It will help the manufacturers in keeping the local prices at
modest level. Keeping the domestic prices of PSF low is necessary to
ensure competitiveness of local manufacturers of textiles and clothing.
Commencement of speciality fibre in Pakistan is a
positive sign. On the one hand it eases the competition in regular fibre
and, on the other hand, earns premium, improving profitability of the
manufacturers. Though, the demand for such fibres is still a small
percentage of total demand of PSF. This has the potential to grow if the
local spinners exploit the potential, by making greater use of such
fibres. This may help them also in achieving higher value addition and
earn extra revenue.
The economic managers must also look into the affairs
of National Fibres. It is a national asset and production at this unit
must restart at the earliest. This unit is located in Karachi and enjoys
proximity with the port and the PTA plant. The unit has the potential to
meet PSF demand of spinning units located in Sindh province.
The PSF industry has invested over one billion
dollars in the last few years to upgrade itself to world scale. Tariff
provides fiscal safeguard to the industry to recover the large
investment it has made and protective incentives to grow further by
making fresh investments. Therefore, it requires an adequate tariff to
sustain its large investment. Investors are baffled as to why the
government has singled out PSF industry. It is the time that the
government should provide an appropriate tariff regime to PSF industry
for a period of five years to ensure conducive working environment.