At present earnings of Polyester Staple Fibre (PSF)
manufacturers are under pressure due to a number of reasons, the most
important factor being glut of supply. The over supply is mainly due
to capacity expansion undertaken by the leading manufacturers
simultaneously in the recent past. However, it is interesting to note
that one of the manufacturers is busy in doubling the plant capacity.
The additional capacity is expected to come online in year 2006.
The depressed profitability of the sector was
evident from the financial results. Profitability of the sector is
expected to remain depressed in the near future unless the
demand-supply equation improves. 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. 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 cost efficiency leading to a relatively bigger margin to
sustain price cuts. There are three major manufacturers in the PSF
sector, namely Dewan Salman Fibres, Ibrahim Fibres and ICI Pakistan,
whereas, Pakistan Synthetics and Rupali are the smaller manufacturing
units. DSF is the largest unit with a market share of 40% followed by
Ibrahim. However, Ibrahim commands the position of price leader in the
domestic market due to having lower cost of production and proximity
to consumers of PSF located in Faisalabad. According to Murad Ansari
of KASB Securities, "The PSF sector faces over-supply situation
due to expansion undertaken by the major players. While most of the
analysts continue to give more weight to the regional situation, they
tend to ignore the fact that the local dynamics overshadow any
positive trend in the regional markets. At the time, domestic PSF
manufacturers were expecting an upward price revision one of the major
players deciding to keep its product price stable and others were
forced to follow the market leader."
With the competition heating up in the domestic
market, local PSF manufacturers are making efforts to sell their
products in the global markets. However, some analysts do not consider
export of PSF from Pakistan a profitable business. They say, "Any
attempt to improve profit margin through export is a futile effort
export can only help in keeping inventories at lower level and
attaining higher capacity utilization. With the Asian region already
experiencing glut of PSF supply, Pakistani PSF manufacturers are
forced to look at European and American markets."
The present profit margin of domestic PSF
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 those markets, which barely covers the cost and freight cost is
also high. It is understood that freight costs to European markets is
almost 10 times higher than the charges for the Asian markets.
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 to the buyers. The rupee appreciation against dollar has
already started affecting the profit margins of exporters of textiles
and clothing. Therefore, they are trying to convince the GoP to take
measures that can improve cotton supply as well as contain PSF prices
to avoid erosion of their profit margins.
It is necessary to 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 inevitable. Saying
this, one must also keep the fact in mind that it will not be easy for
the local exporters to negotiate higher price for the already signed
export orders, at the best they may succeed in acquiring new orders at
Textile industry had two outstanding demands, i.e.
the GoP should withdraw duty applicable on the import of PSF and its
inclusion in Duty Tax Remission for Export (DTRE) scheme. In the
federal budget for year 2003-04, the GoP 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 on PSF is
due to the guarantees extended to the sponsors of Pakistan PTA. This
unit has substantial equity stake of foreign investors.
Textile industry is of the opinion that if the GoP
had any agreement with any foreign investor why should the local
industry 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 for a specified period is also
According to some analysts, "The GoP critics
do 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 have achieved only because protection was offered to
investors. The strategy was aimed at achieving self-sufficiency in PSF
to insulate its domestic consumers from volatility of prices of
man-made fibre in the global markets."
At present five PSF manufacturers are operating in
the country. 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
The local spinners often complains that the local
PSF manufacturers are selling their product at prices 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
Some sector experts say that local spinners have
been over-playing 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 has been consuming about two million tonnes of
cotton, the consumption of PSF has been around 400,000 per annum. It
was only recently that exports of synthetic textile attained any
significant share in Pakistan's total exports.
PSF is a man-made synthetic fibre used in the
textile industry for blending with cotton and other man-made fibres to
produce blended yarn. The major raw material used in for the
manufacturing of PSF are Pure Terephthalic Acid (PTA) and Mono
Ethylene Glycol (MEG). Both PTA and MEG are petrochemical derivatives
made from Naphtha.
PSF started gaining importance in Pakistan in
eighties as a complement to cotton for the manufacturing of blended
yarn. For considerably long time spinners, prime choice was cotton due
to its easy availability and low price. PSF was not made locally and
entire demand had to be imported. However, the subsequent increase in
cotton prices and shortfall in production for a number of years
coupled with gradual shift towards blended fabrics created demand for
Synthetic fibre is essentially a commodity and
manufacturers are exposed relatively high volatility in production,
revenue and profitability. Domestic prices of PSF normally move in
tandem with its international prices. Whereas, prices of PTA and MEG
are linked with the international prices of crude oil. The domestic
demand for PSF has been driven by global as well as domestic demand
for blended textiles and clothing. Uniform quality and availability
throughout the year reinforces the use of PSF in blended yarn.
Dewan Salman Fibre (DSF) is part of the Dewan Group
having diversified interest. Besides, having stake in PSF the Group
has stake in sugar, automobile and textile spinning. DSF is the
Group's flagship company and has been the market leader in the PSF
since its inception. The company has four PSF manufacturing units with
a cumulative production of 270,000 tonnes per annum and one unit of
acrylic fibre with an installed capacity of 25,000 tonnes per annum.
DSF is the only company that manufacturers acrylic
fibre, primarily used in woollen mills. Due to local climatic
conditions there is little domestic demand for blended woollen yarn.
The major market is exports of woollen yarn, fabrics and made-ups.
However, Pakistani exporters are not very active in these products.
The recent past has been a nightmare for DSF for
two reasons. A price-setting competitor had surplus capacity and
geopolitical uncertainties kept raw material prices high. However, the
declining trend of interest rates allowed the company to reprofile its
debt, helping in reducing financial charges substantially. The future
looks promising because of robust domestic demand for PSF and any
improvement in capacity utilization will yield additional benefits.
The company has reprofiled its debt and the average
financial cost has declined by 700 bps as a result financial charges
are expected to be 37% lower for the year 2004. Another factor
contributing to reduction in manufacturing cost is gradual conversion
of its plant from furnace oil to natural gas. After the full
conversion the company will be able to save over one billion rupee or
25% of its fuel cost. If PSF prices remain stable in the domestic
market, DSF is expected to achieve about 10% increase in its gross
One of the major issues facing the company is high
inventory level, needing higher working capital requirement. This also
exposes the company to inventory losses, due to any decline in
domestic prices of PSF. The company is making efforts to reduce
inventory levels by exporting part of its surplus production. DSF is
probably the only exporter of PSF. While the margins on exports may be
negligible its helps in achieving higher economies of scale and
reducing average cost per kilogram of fibre.
Ibrahim Fibres is the flagship company of Ibrahim
Group. The Group started with trading of cloth and gradually
diversified into manufacturing of textiles and finally into PSF
manufacturing. The Group has merged all its textile units and its
captive power plant into Ibrahim Fibres. The company is a well-run
entity and is well entrenched in the market.
It is the second largest producer of PSF in the
country with an installed capacity of 208,600 tonnes per annum. The
biggest advantage enjoyed by the company is its strategic local, in
close proximity of the hub of textile industry in Faisalabad. This
gives the company an advantage over other manufacturers through low
transportation cost and just-in-time inventory. The group also owns
textile units, which consume about 1% of its current production.
The company has acquired its plants from Lurgi
Zimmer AG, Germany, one of the top companies in the world. Lurgi has
also provided the technological know-how for the manufacturing of PSF.
Ibrahim is currently the lowest cost producer in the country. The
basic raw materials are entirely imported against long-term supply
contracts. The supply glut kept capacity utilization low, around 70%.
However, lately the plant has been operating at full capacity, which
will also improve the average capacity utilization for the full year.
Ibrahim is currently working on the expansion plan,
which will double its installed capacity from present 208,600 to
417,200 tonnes per annum. The additional capacity is expected to come
online in year 2006. Keeping in view the growth in PSF consumption,
the new capacity will come online at a time when the demand is
expected to surpass the production from existing installed capacity.
ICI Pakistan pioneered PSF technology in Pakistan
through its investment in a 12,000 tonnes per annum PSF manufacturing
plant commissioned in 1982 in Sheikhupura, near Lahore. Successive
expansions and de-bottlenecking in the late1980s and a major expansion
in 1996, costing US$ 100 million, have enabled it to retain its strong
position in the industry. Arrangements for off balance sheet
financing, through the establishment of an industrial modaraba have
successfully increased PSF manufacturing capacity from 65,000 tonnes
to 109,000 tonnes per annum
The plant has achieved record production, which was
possible as a result of utilizing the incremental capacity made
available following the de-bottlenecking as well as improvement in raw
material conversion efficiencies and higher plant availability
compared to previous years. The production record is now equal to or
even better than those in competitive plants in the region using
DuPont technology. As the focus of textile industry shifts from lower
value addition to niche products, ICI has exploited the availability
of batch line technology to strategically develop and produce variant
fibres. While some of these variants have already been launched,
development continues on other fibres aimed at providing spinners with
a distinct edge over their competitors.
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. Therefore, the
PSF manufacturers are right in demanding that either the GoP should
reduce the import duty on PTA and MEG or take some measures that can
keep local production of PSF a viable business.
It has been often alleged that a cartel prevails in
PSF industry. Under the cartel, production quota of each manufacturer
is fixed, on the basis of installed capacity and prices are also be
fixed by the cartel. The spinners are the biggest opponents of such a
cartel. If the presence of a cartel is accepted, it was aimed at
ensuring decent profit for each manufacturer. The cartel was said to
be necessary due to over supply. However, the 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.
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 pose 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 also keep the fact
in mind that global demand for PSF is expected to surpass the supply
in the near future. This may resulted in higher global prices of PSF.
At a time when cotton prices are high they must take the best
advantage of indigenous availability of PSF by entering into long-term
supply agreements with the local manufacturers. PSF is not a
substitute for cotton it rather complements cotton.