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
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.