1- ENERGY SECTOR
2- COTTON MARKET
3- FEDERAL BUDGET 2003-4
4- SHIPPING
5- FERTILIZER
6- FOREIGN TRADE
7- SUGAR INDUSTRY
8- INSURANCE
9- TEXTILE
10- AVIATION
11- THE STATE OF ECONOMY
12- PSF SECTOR

 

GOOD PROSPECTS FOR PSF

 

Profit margins to remain under pressure due to oversupply

 

By AYESHA A. JANGDA
Investment Analyst at AKD Securities
                                                   May 19- 25, 2003 

 

 

 

 

Pakistan's first PSF manufacturing unit, National Fibres Limited was set up in 1981. At present the local PSF industry consists of six major players out of which Dewan Salman Fibres dominates the market with a market share of 40%, followed by Ibrahim Fibres (37%). Over the past year, the installed capacity of PSF industry has increased from 445,000 tpa to 618,000 tpa due to the capacity expansion of 44,000 tpa by ICI and 138,600 tpa by Ibrahim Fibres.

Installed PSF Manufacturing Capacity in Pakistan

Company

Year set-up

Location

1998

1999

2000

2001

2002

2003

National Fibre

1981

Karachi

12

12

12

0

0

0

ICI Pakistan

1982

Lahore

60

60

60

63

74

107

Rupali Polyester

1988

Lahore

22

22

22

23

23

23

Pakistan Synthetics

1991

Hub

28

28

28

28

28

28

Dewan Salman Fibre

1992

Hattar

109

109

109

229

250

250

Dhan Fibre

1996

Hattar

91

91

91

-

-

-

Ibrahim Fibre

1997

Faisalabad

70

70

70

70

70

210

TOTAL CAPACITY

392

392

392

413

445

618

 

 

The issues currently facing the psf industry are:

* OVERSUPPLY SITUATION
* DECLINE IN MARGINS

OVERSUPPLY SITUATION

Cotton output this season would be around 10 million bales, against the target of 10.5 million bales. There may be a shortfall of 2.0 million bales this year as the total requirement of domestic mills is expected to be around 12 million bales. Moreover, there is an abnormal hike in the world cotton prices due to the lower output in China, USA, Australia and other countries. This would result in higher demand for the locally produced man-made fibers like PSF, as it would be used in even higher quantity in blended yarn. In addition to this, massive expansion and BMR has been done in the spinning sector in the last two years, which is likely to absorb the additional supply of PSF considering the shortfall in cotton production this year. It has been observed that in Pakistan there has been a slow movement towards the global fibre-cotton blending consumption ratio of 56:44. A huge export market potential exists in the area of blended yarns like poly-cotton and synthetic yarns. With improvements in the local blending ratio from 7:93 in FY90 to 19:81 in FY01, with the continuation of this trend by yarn and textile manufacturers would result in increased absorption and thus demand for locally produced PSF going forward.

ECLINE IN MARGINS

There has always been a strong correlation between international and domestic PSF prices. Local producers are price takers who adjust their prices in line with imported fibre and raw material prices. Due to Iraq war and political turmoil in Venezuela the crude oil prices soared up to as high as US$ 32 per barrel causing the prices of other petrochemical products which include PTA and MEG to rise. Purified Teraphthalic Acid (PTA), and Monoethylene Glycol (MEG) are petrochemical derivatives and are the raw materials of Polyester Staple Fibre. MEG is sourced from mono ethylene glycol, whereas PTA is sourced from paraxylene. Therefore the prices of PSF, PTA and MEG are linked to the crude oil prices. Since January PTA prices started rising and reached US$800 per ton until March, showing a 51% increase from US$530 in December 2002. While, MEG prices also continued to rise reaching to US$780 per ton, a 56% increase from the December price level of US$500 per ton. As a result of this surge in raw materials costs, polyester prices sharply rose in Pakistan by Rs20 per kg in matter of two months.

Local PSF Prices

Rs/kg

Ex-Sales Tax

January 1, 2003

60

February 1, 2003

63

February 15, 2003

70

March 1, 2003

75

March 15, 2003

80

April 1, 2003

75

April 7, 2003

70

April 15, 2003

63

May 1, 2003

60

 

 

With the sharp downturn in crude prices from US$39/barrel to US$29/barrel after the fall of Saddam's government in Iraq the PTA and MEG prices fell to US$620/ton and US$650/ton respectively. This has led the domestic manufacturers to lower PSF prices after four consecutive price increases to Rs.75/kg on April 1st. Similarly, cost and freight (CnF) prices fell from a height of US$ 1.2 per kg to US$ 0.98 per kg in the Asian market. With the expectations of further drop in prices the buyers are following a wait and watch policy, which has resulted in sluggish offtake of PSF from textile industry. As the textile manufacturers, who were themselves facing reduced margins due to rising prices of cotton, PSF and fuel, and decline in fresh orders due to economic slowdown in US and EU.

Usually the international price increase provides inventory gains and margin improvement to the local manufacturers but this time around, the surge is cost inflated which has caused tremendous volatility in the primary margins of PSF. The current price reductions has not resulted in PSF manufacturers suffering negative primary margins as margins are still around Rs19.26/kg on April 15th compared to Rs 19.70 on April 1st. It has been observed that despite reductions the industry margins well above the benchmark (regional average) of US$200/ton. Furthermore, currently, the PSF prices are at a discount to cotton prices of Rs68/kg (Rs. 2720/40kg). Moreover, the PSF industry as a whole is unlikely to suffer because the players normally act as a disciplined "alliance" in terms of price fixation.

Rs-US$=58

1-Jan

1-Feb

15-Feb

1-Mar

15-Mar

1-Apr

7-Apr

15-Apr

1-May

Local PSF Prices PkR/kg (exl.20% GST)

60

63

70

75

80

75

70

63

60

PTA Asia SPOT price

650

650

700

790

800

800

680

620

580

MEG Asia SPOT price

560

610

650

720

790

780

740

650

600

US$/ton

Local PSF Prices

1034

1086

1207

1293

1379

1293

1207

1086

1034

PTA Cost (86%)

559

559

602

679

688

688

585

533

499

MEG Cost (34%)

190

207

221

245

269

265

252

221

204

.

749

766

823

924

957

953

836

754

703

Primary Margin

285

320

384

369

423

340

370

332

332

Primary Margin (Rs/kg)

16.53

18.55

22.27

21.40

24.52

19.71

21.49

19.26

19.24

 

 

FUTURE OUTLOOK

It is forecasted that world demand for man-made fibers would increase by 5.4% per annum to 44 million metric tons in 2005. Considering this, it is assumed that domestically and internationally the PSF industry will achieve good profitability in times ahead. Until then one wishes to see the commodity cycle to turn upward so that the demand and margins of the PSF industry recover. On the other hand, certain factors such as higher cotton supply-demand gap, restructuring and expansion of the spinning sector and increased focus on international markets for PSF exports are likely to result in an improved outlook for the domestic PSF industry in 2003.