.

1- REVALUATION OF INVESTMENT PORTFOLIOS OF BANKS
2- CAPACITY EXPANSION IN PSF SECTOR
3- COMMODITIES ARE RIDING ON CHINA'S COATTAILS

4- FOREIGN INVESTMENT IN PAKISTAN
5-
TECHNICAL TRADING AT KSE


CAPACITY EXPANSION IN PSF SECTOR

 

Will it lead to another oversupply?

.
By SHABBIR H. KAZMI
Oct 04 - 10, 2004
.

 

 

 

 

Lately, polyester staple fibre (PSF) price has increased by Rs 4/kg going up to Rs 88/kg. This marks the second major increase in two months. The reason for this upward revision is the constant increase in PTA and MEG prices, the two-key raw materials. During September PTA prices increased by 6% and MEG prices went up by 3.6%. PSF prices are expected to remain high in the near future due to the rising oil prices. However, that may affect PSF demand adversely due to declining cotton prices. Cotton prices have been on the decline mainly due to an expected bumper cotton crop in Pakistan as well as in other major cotton producing countries.

According to a KASB Securities report, "We are of the opinion that the local PSF prices are still a shade below its international prices, because the local producers have not been able to pass on the entire impact of the cost increase to the consumer. The recent price increase is likely to provide much needed breathing space to the manufacturers, who have been struggling to pass on the cost increases." Therefore, it becomes necessary to have a closer look at PSF sector, particularly the expansion plans.

PSF sector has come a long way and shown volumetric growth with an upsurge in demand touching 565,000 tons annually. The off take is expected to exceed 620,000 by year 2005. The industry has been marked by an oversupply situation due to the expansions in last two years. Keeping in view the rising demand, Ibrahim Fibres has initiated yet another expansion plan. After the completion of this plan, total production capacity of Ibrahim will be doubled. ICI Pakistan has also announced to add another 15,000 tons capacity to its existing facilities.

The growth pattern of the PSF stems from ever-growing textile industry of Pakistan. With constant addition of new spindles and lower then required production of cotton in the country, PSF demand has been growing in double digits. Yet another factor fueling PSF demand has been the shift in blending pattern with cotton. Though, the ratio of PSF has gone up in Pakistan, it is still below the international standard. This can only be attributed to the difference in climatic conditions of Pakistan and the major buyers of textiles and clothing from Pakistan.

According to textile sector experts, local industry has spent over 4.5 billion dollars for BMR as well as technological advancement. The forecast was that next couple of years would be a booming period for the local PSF manufacturers. However, the hopes are dampening due to declining cotton prices around the glob. Therefore, the economic viability for producing 100% cotton yarn or blended yarn has to be reworked. There are two points of views regarding the outlook for local PSF industry.

 

 

One group strongly believes that the PSF manufacturers will once again end up with 'oversupply'. Their point of view is based on forecast or bumper cotton crop and its declining prices, which yield PSF unattractive. However, they are also of the view that the oversupply is a temporary phenomenon. No one can predict the size of final crop with certainty. More importantly, because the entire crop has not reached the ginneries and it is still exposed to climatic conditions.

As opposed to this, supporters for additional capacity say, "The PSF demand in Pakistan is expected to cross 620,000 tons mark and the additional capacities may not be sufficient to meet the burgeoning demand if spinners decide to match the global standard of blending. Besides, keeping in view the year to year variation in cotton out put in Pakistan, ample capacity for PSF should always be there." They also say that PSF is not a substitute for cotton, it complements cotton.

The major market share of PSF is enjoyed by two companies, Dewan Salman Fibre and Ibrahim Fibres. It is often said that in the declining margins environment Ibrahim has better shock absorbing capacity mainly due to its proximity to end users of PSF. The other factors contributing to its strength are plant efficiency and relatively lower cost of production. It is also said that that now Ibrahim has attained the power to set the PSF selling price in the domestic market.

At present Dewan Salman enjoys the largest share of 39% in terms of installed capacity. The other major producers are Ibrahim (34%), ICI Pakistan (18%), Pakistan Synthetics (5%) and Rupali (4%). However, once Ibrahim's additional capacity comes on it will emerge as the largest producer of PSF in the country. Ibrahim is at set to double its PSF production capacity from present 208,600 tonnes to 438,000 tonns per annum.

However, some analysts are of the view that the recent takeover of management control of Allied Bank of Pakistan by the Ibrahim Group may put some constraints on its PSF expansion plan. However, others say, "Liquidity or mobilizing funds was never and will never be a problem for the Group. It is keener to add capacity during the lean time, as it has done in the past. Commencement of production during lean time provides enough time to overcome the teething problems."