Will the formation of cartel help in overcoming the situation?

July 14 - 20, 2003



Fears of many sector analysts that the prevailing oversupply situation in the Polyester Stable Fibre (PSF) sector would dampen its profitability seem to be materializing. The depressed profitability of the sector, over the past 3 to 6 months, is evident from the financial results that have started coming. Profitability of the sector is expected to remain depressed in the near future unless the demand-supply equation improve, which to many analysts remains a far cry.

According to industry sources, the PSF sector is going through a unique phase. Ibrahim Fibres has attained the position of price leader and others players have no option but to follow the market leader. According to industry sources other manufacturers are forced to sell their product either at marginal profit or at cost, in some cases, even below cost. Analysts attribute this power of Ibrahim to conversion of cost efficiency and a relatively bigger margin to sustain price cuts.

With the commissiong of Ibrahim's expansion plant, the sector faces two problems oversupply and Ibrahim attaining the position of price leader. Manufacturers' effort to explore export markets only helps in keeping inventory at lower levels but hardly helps in making even marginal profit. Yet the situation has become further grim due to inclusion of PSF in Duty and Tax Remission on Exports (DTRE) Scheme. It is feared that some of the local spinners may prefer to use imported PSF.

According to Murad Ansari of KASB Securities, "We all know that the PSF sector faces over-supply situation after the commissioning of Ibrahim's expansion plant. However, our fellow analysts continue to give more weight to the regional situation. What is generally being ignored is the fact that the local dynamics overshadow any positive trend in the regional markets. The domestic PSF manufacturers were expecting an upward price revision at the beginning of July. However, with one of the major players deciding to keep its product price stable, rest of the manufacturers have been forced to follow. As a result, PSF prices remained steady as the price revision announcement was postponed."

With the competition heating up in the domestic market, local PSF manufacturers are making efforts to sell their products in the global markets. However, Murad does not consider export of PSF from Pakistan a profitable business. He says, "In our research reports, we have said time and again that exploring global markets is futile exercise. It only helps the local manufacturers in keeping inventories at lower level and attaining higher capacity utilization. With the Asian region already surplus in PSF supply, Pakistani PSF manufacturers are forced to look at European and American markets. However, the price bagged by the domestic PSF manufacturers is the same as in the Asian region."

The present profit margin of the manufacturers is mainly due to the protection enjoyed by the industry. Therefore, the profits are virtually non-existent in export markets. Local manufacturers have to sell their product at the prices prevalent in the regional markets, which barely covers the cost. If they sell their product to European and American markets, the freight cost is too high. It is understood that freight costs to European markets is almost 10 times higher than the charges for the Asian markets.

After the merger of Dhan Fibre into Dewan Salman Fibre and expansion of capacity by Ibrahim, the two players dominate the sector. The third significant player is ICI Pakistan. The remaining players are of comparatively smaller size. However, enjoying comparatively low conversion cost and proximity with spinning units located in Faisalabad, Ibrahim enjoys an edge over all its competitors. It also has a substantial in-house consumption of man-made fibre.



Will the others bow down before Ibrahim and join the cartel? The general feeling is that the other manufacturers may find it difficult to compete with Ibrahim on price and might end up with a compromise. Accepting Ibrahim as market leader and lower share in the cartel can guarantee modest price and minimum capacity utilization. Sector experts believe that Ibrahim's plant is more efficient as compared to other PSF manufacturing facilities. It can also sustain price war for a longer period as compared to its competitors.

Cartel has been in existence for ages. It appears that after cement sector, PSF producers are also in the process of forming a cartel. Under the cartel production quota of each manufacturer will be fixed, on the basis of installed capacity. Prices will also be fixed by the cartel. It is expected that spinners would be the biggest opponents of the cartel. However, oversupply seems to be a temporary phenomenon. Consumption of PSF is expected to take a quantum leap due to enhanced textile quota allocation by the European Union and signing of Trade and Investment Framework Agreement (TIFA) with the United States of America. Pakistan's textile industry is expected to be the largest beneficiary of TIFA, which will lead to free trade between the two countries.