Demand will exceed supply in year 2005


May 10 - 16, 2004





The Polyester Staple Fibre (PSF) industry is witnessing a turnaround at the back of strong growth in demand. The year 2003 was the worst year for the sector. In 2004, the improvement in profitability is visible. Re-profiling of debt by the players is contributing to improvement in bottom line. Since no additional capacity is expected to come online in 2004, the players are expected to post higher profit. Keeping in view the growing demand, one of the players seems to be all set to double its installed capacity by 2006.

According to sector experts a number of factors have contributed towards turnaround of the sector, primarily comprising of three major producers namely Dewan Salman Fibre (DSF), Ibrahim Fibres and ICI Pakistan. At present DSF controls the largest market share (40%), followed by Ibrahim (34%) and ICI (18%). This provides the players pricing power. This is evident from the recent increase in PSF prices despite raw material prices remaining the same.

The other factors contributing to improving bottom line are growing exports, higher offtake due to high cotton prices and product diversification. Although, the margins are negligible in the export market, it allows domestic manufacturers to maintain higher prices in the domestic market. The strong demand is keeping low pressure on the industry. This has been further complemented by the high cotton prices. PSF and cotton are complements as well as substitutes to each other. According to Abdullah Amin of AKD Securities, "The increased demand of PSF in November and December 2003 was partly due to substitution effect as well. Going forward, the growing demand will continue to help the industry".

The story of turnaround is complete without mentioning the debt re-profiling undertaken by the leading players. The key factor responsible for improving bottom line of DSF was the re-profiling of debt. The company was able to reduce its financial charges by 36%. The year 2003 was a nightmare but the company was able to post impressive profit. Not only that the company has been able to improve its margins, the efforts to increase production of acrylic fibre have also yielded positive results.

Ibrahim Fibres has also succeeded in bringing down its financial charges substantially and to improve its bottom line. However, the key factor leading to improved bottom line has been the increase in sales volume. Year 2004 marks the full year commercial production of its new plant leading to increased PSF production and sales. The company is located in the hub of textile activity (Faisalabad) and enjoys an edge over its competitors due to strategic location. It is the only player, which is seriously working on further expanding its installed capacity. The company plans to double its capacity by year 2006. Once the additional capacity commences commercial production Ibrahim will have the largest share (49%) and share of DSF and ICI will reduce to 32% and 13% respectively.

Two factors high cost of raw material and threat of withdrawal of regulatory duty continue to dampen the outlook for PSF industry. The GoP has already included PSF in the DTRE but spinners are still demanding withdrawal of regulatory duty. The duty was imposed to ensure decent margins for Pakistan PTA. Over the last one year the company has succeeded in improving its margins and also post profit lately. Therefore, it is expected that in the forthcoming budget the GoP may withdraw the regulatory duty of PSF import.



The silver lining is that with the massive investment in spinning sector and keeping in view the gradual shift from production of 100% cotton yarn to blended yarn the average capacity utilization of the key players will improve significantly. This will further improve the pricing power of the PSF manufacturers. However, this ability will largely depend on the international prices of PSF. China has lately emerged the largest buyer of man-made fibre and the glut of supply has reduced to a large extent. If the PSF prices in the international markets remain high, the local producers would be able to keep prices around the same level because over-supply phenomenon will no longer be there.

Some of the local PSF manufacturers are attempting to enter export market. As a make shift arrangement the attempt may yield some positive result, improved capacity utilization, but there is no doubt that domestic sales offer better margins. Concentrating on the domestic market has enabled Ibrahim to improve its sales and margins and also to decide to further expand its production capacity.

Last but not the least, the efforts of local PSF manufacturers to further improve the quality and production diversification and differentiation have also started yielding positive results. Achieving the highest possible capacity utilization is the key to success and this can only be achieved by keeping the domestic buyers satisfied. The declining import of PSF proves that the domestic buyers are keen in local purchases but only at competitive prices.