INDUSTRY

 
1- AUTO SECTOR LURING INVESTMENT
2-
SUGAR GROWTH LOOKING FOR PROSPECT
3-
SHRINKING MARGINS OF PSF INDUSTRY
4-
TEXTILE INDUSTRY FACING NEW CHALLENGES
5- CEMENT SECTOR FLYING HIGH
 

SHRINKING MARGINS OF PSF INDUSTRY

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Although a swift recovery is not imminent probably the worst time is over

 

By SHABBIR H. KAZMI
May 09 - 15, 2005
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Polyester Staple Fibre (PSF) manufacturers are facing a tough time at this time. It is because of two reasons: 1) rising prices of PTA and MEG and 2) declining prices of cotton. Due to lower off-take of PSF, the manufacturers are not in a position to pass on the hike in raw material coat to the end users. Abundant availability of cotton at attractive prices also does not provide any incentive to the spinners to produce more of blended cotton yarn. As long as the scenario remains the same the earnings of PSF manufacturing companies are expected to remain under pressure.

Keeping in view the growing demand some of the manufacturers had initiated expansion plan. When these companies embarked upon this program it was said that the sector would suffer from glut of supply. It was also believed that by the time expanded capacities come online the oversupply situation would become manageable. However, the crisis like situation has emerged earlier then expected. And the situation could only worsen if oil prices remain high and cotton prices remain low.

Traditionally, PSF has been considered a substitute for cotton in Pakistan. However, the perception changed lately and spinners started believing that PSF complements cotton. Following this philosophy a number of sponsors of spinning mills either made the necessary amendments in the existing units or added facilities for producing blended yarn. This yielded good results because off-take of blended yarn increased substantially and led to enhanced production of blended fabrics also.

The quantum of fresh investment could be gauged by capital expenditure being undertaken by ICI Pakistan. The company has embarked upon a US$ 15.4 million expansion. This will increase the company's PSF production capacity to 122,000 tonnes per annum, from existing 112,000 tonnes. The project will take 15 months to implement and the plant is expected to come online by the middle of 2006. The plan incorporates mothballing of two of the polyester segments older batch lines and replacing these with a single line that will improve efficiency. Principal benefits to the company of this PSF expansion are: 1) maintenance of current market share and 2) improvement in margins through Rs250 million reduction in costs per annum.

As against this, the third quarter financial results of Dewan Salman Fibres exhibits a very depressing story. Both gross and net sales have been at their lowest this quarter. This was despite of higher average PSF prices this year compared to last year. This clearly establishes that cotton factor was very much in place. Gross margin for 9-month period stood at 10.6%, which was 34% lower than that for corresponding period last year. This shows not only the cost of production impact but also the paucity of sales.

According to a report from KASB Securities, "The main reason for the dismal performance has been extremely high cost of sales, and the cotton factor is still relevant to the dismal state of the PSF sector." The report also says, "Whilst assuming that Dewan Salman Fibres would post disappointing results for the third quarter, we underestimated the true extent of damage. As a result of poor demand in second quarter, the company was in fact left with high levels of unsold PSF stocks, which it sold this quarter. Since September 2004, prices of PTA and MEG have been on a continuous uphill trend. While raw material prices eased off slightly in third quarter, they remained higher as compared to last year."

 

 

It would not be wrong to say that performance of Dewan Salman Fibres also reflects performance of the sector. The extent of adverse impact may not be the same on all the players depending on the location of the plant and the clientele. For example, Ibrahim Fibre is located in the region having the largest population of spinning units. The same is also true about ICI Pakistan, which is in close proximity of Faisalabad. However, the adverse impact may be severe on Dewan Salman Fibres because of its location.

Saying this, analysts are of the view that future may not be as bleak as it appears at present. The recovery should be in place because of growing export of textiles and clothing from Pakistan in general and export of blended fabrics in particular. Besides, the intensity of crude oil price volatility is also on the decline. However, oil prices are expected to remain on the higher side in the near future, meaning that PTA and MEG prices will also remain high.

Last but not the least, many analysts are of the view that there was a need to expand the installed capacity for PSF manufacturing. The present low demand will give the manufacturers to overcome the teething problems and get fully ready to meet the enhanced off-take in due course. However, they are of the view that low product diversification will continue to haunt the manufacturers. They must opt for product diversification and value addition rather than producing similar products.