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1- NATIONAL BANK POISED FOR CONSOLIDATION & GROWTH
2- FOREIGN INVESTMENT IN PAKISTAN
3-
CORPORATE GOVERNANCE
4- PSF INCLUDED IN DTRE SCHEME
5- FOOTWEAR: LOCAL VS IMPORTED
6- CHINESE PRODUCTS: CHALLENGES FOR LOCAL BUSINESSES

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PSF INCLUDED IN DTRE SCHEME


Profitability of local manufacturers may come under pressure

 

By SHABBIR H. KAZMI
June 16 - 22, 2003
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Textile industry had two outstanding demands namely withdrawal of duty on imported polyester staple fibre (PSF) and its inclusion in Duty Tax Remission for Export (DTRE) scheme. In the budget for year 2003-04 the government has accepted the second demand and expressed its inability to even lower the duty rate on imported PSF. The inability of the GoP to reduce the duty is due to the guarantees extended to sponsors of Pakistan PTA. This unit has substantial equity stake of foreign investors.

Textile industry was not happy when PSF was not included in DTRE scheme in 2002-03 budget. It was of the opinion that if the GoP had any agreement with any foreign investor, why should the customers be penalized. The GoP should compensate the investor from its own resources. However, some analysts do not agree with this rationalization. They say that textile industry in Pakistan has survived and flourished only because of protection. If protection of textile industry for over half a century was justified, the protection to the sole manufacturer of PTA is also justified.

The fact is that textile industry does not recognize two important achievements made in the recent past, i.e. establishment of a PTA manufacturing plant and massive investment by PSF manufacturers to expand installed capacity in the country. Both the targets were achieved only because protection was offered to the investors. The strategy was aimed at achieving self-sufficiency in PSF to insulate the domestic consumers from volatility of prices of man-made fibre. It seems that textile industry only appreciates those moves that are for its own benefit and often ignores the national objectives.

At present five PSF manufacturers meet bulk of the local requirement. Collectively they have installed capacity to produce 618,000 tonnes PSF annually. Till year 2002, they had an installed capacity to produce 445,000 tonnes PSF annually. This increase was mainly due to addition of capacity by ICI Pakistan and Ibrahim Fibre. Currently, Dewan Salman (after the merger of Dhan Fibre) has the largest installed capacity, followed by Ibrahim Fibre and ICI Pakistan.

INSTALLED CAPACITY

(Tonnes/annum)

Dewan Salman

205,000

Ibrahim Fibre

210,000

ICI Pakistan

107,000

Pakistan Synthetics

28,000

Rupali Polyester

23,000

 

 

Textile industry often complains that the local manufacturers of PSF charge price that is higher than the landed cost of fibre. However, analysis of prices of locally manufactured PSF indicates strong correlation between domestic prices and its global prices. Since the prices of two basic raw materials, PTA and MEG, are dependent on the movement of crude oil prices, local manufacturers also have to adjust prices accordingly. Therefore, blaming the local PSF manufacturers for profiteering may not be correct.

LOCAL PSF PRICES

(Rs per kg excluding 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

 

 

Some sector experts say that local spinners have over-played the importance of PSF prices for attaining higher exports. Historically, bulk of Pakistan's exports comprised of 100% textiles and clothing. It is also evident from another fact that while textile industry consumes about two million tonnes of cotton, it consumes around 400,000 tonnes of PSF. It was only recently after the establishment of PSF manufacturing facilities, that exports of synthetic textile attained any significant share in total exports.

OUTLOOK

The bad days of Pakistan PTA seems over. It has a 400,000 tonnes/annum PTA manufacturing facility established at a cost of US$ 490 million. In this company ICI Pakistan has 25% equity stake. According to January-March 2003 report of Pakistan PTA, production was 110,775 tonnes or 111% of designed capacity. The company sold 112,271 tonnes, out of these 86,085 tonnes was sold locally and 26,186 tonnes exported. However, accumulated losses remain a serious concern. The company enjoys protection till year 2008 and it is expected that it would be able to wipe out its losses over the years.

It appears that prices of crude oil will remain high in the near future and continue to keep margins of local PSF manufacturers under pressure. The induction of PSF in DTRE scheme has provided an opportunity to exporters of textiles and clothing to contain their cost without going through the hassle of filing refund claims. Therefore, duty on PSF has become of no consequence for them. One may argue that it still possess problems for those who are not registered under DTRE scheme. The solution is simple, get registered under the scheme to qualify for the benefit.

Local textile manufacturers must note that global supply of PSF is expected to be lower in the near future. This may resulted in higher global prices of PSF. They must take the best advantage of indigenous production by entering into long-term supply agreements with the local manufacturers.