The polyester staple fibre industry is in trouble because its gross margins continue to be under pressure owing to a variety of factors like cheaper and under-invoiced imports from China, and volatility in raw material prices.
With almost a third of the country’s total annual installed capacity of around 800,000 tonnes already closed, the industry is struggling for its survival.
Indeed, the imposition of anti-dumping duty in the range of 2.8pc and 11.5pc on low-priced PSF imports from China, for five years, in February last year and rebounding global crude oil prices have helped manufacturers slightly improve their capacity utilisation and gross margins over the last one and a half years. Yet the future of the industry, according to a senior executive of Ibrahim Fibres, continues to depend on creation of a ‘level playing’ field for local producers.
“We have seen Dewan Salman Fibres shut down in 2009 and Pakistan Synthetic in 2015 owing to unfair competition from China. If the Chinese continued to dump their surplus production in Pakistan for another few years, the remaining factories will also be forced to close down,” the executive said on condition of anonymity.
At present, the three players — Ibrahim Fibres, ICI and Rupali Polyester — are using less than three quarters of their operational capacity of 537,000 tonnes a year because of competition with Chinese imports.
According to a report by Pacra, a local credit rating agency, the industry’s revenues dropped about 6pc to Rs44.16b and gross margins were -0.8pc at the end of June 2016 from Rs46.94b and -0.9pc a year ago, despite a 5pc increase in capacity utilisation to 73pc from 68pc. Lower crude prices are blamed for the drop in revenues.
With almost a third of the country’s total annual installed capacity of around 800,000 tonnes already closed, the polyester staple fibre industry is struggling for survival
The share of local producers in the market grew by over 11pc to 400,000 tonnes in 2016 from 360,000 tonnes the previous year compared with a drop of more than a fifth in imported PSF sales. Historical data shows that the domestic PSF industry’s earnings were as high as Rs64.91bn and gross profit margins 1.3pc in 2014, Rs57.11bn and 4.3pc in 2013 despite lower capacity utilisation of 68pc.
The local industry saw its prices fall from $1.8 per kilo in 2013 to $1.1 in 2016 with a commensurate decline in imported Chinese PSF from $1.5 a kilo to $0.9.
Domestic PSF producers also enjoy 7pc duty protection against imports in addition to anti-dumping duty imposed by the National Tariff Commission last year. But manufacturers contend that the impact of duty protection and anti-dumping duty is nullified because of under-invoicing and smuggling of PSF imports from China.
“Currently, the Chinese product is costs less than a dollar a kilo compared with the local PSF price of more than $1.25,” a senior official of ICI, which has been acquired by the Younus Group, told Dawn. “China sells almost 80pc of its PSF at premium prices around the world and dumps the remaining in countries like Pakistan at less than the price of the raw materials used in manufacturing.”
Ibrahim Fibres’ executive said the industry had invested massive amounts of money in their PSF manufacturing facilities. “Our company had invested Rs22bn to complete our third plant in 2015 to expand capacity but we are unable to operate at our full operational capacity due to unfair foreign competition.”
Compared with the world cotton and synthetic fibre mix of 25:75, the use of man-made fibres by Pakistan’s textile industry remains 80:20. The textile manufacturers and exporters often blame the higher-than-world prices of locally produced synthetic fibres because of tariff protections to the manufacturers for its lower use by the textile industry.
“It is totally misleading to blame us for the low use of synthetic fibres by local textile producers. The demand for polyester staple fibre has been stagnant for several years because of massive import of PSF-based fabric and garments from countries like China and Thailand etc. Let me warn you today: if we are forced to shut shop the Chinese exporters will sharply increase their prices. We have seen this after the closure of Deewan Salman when China raised its prices by Rs20-30 a kilo to take advantage of shortages in the Pakistani market.”
He said it was important to save the domestic industry to protect jobs. “We don’t want a ban on imports, let me clarify. What we want is protection against unfair competition and practices to protect our investments as well as the 6,000 jobs associated with this industry.”
Industry sources say 90pc of the PSF-based textile products made in Pakistan are used in the domestic market. Therefore, it is grossly unfair to suggest that the lower use of synthetic fibres by the local industry is hurting the country’s textile exports.
“The protection to the local PSF industry doesn’t hurt exporters. If you want to use imported synthetic fibres for exports you can use DTRE scheme. There’s no restriction on that,” the ICI official said. “If textile exports are declining it is because of other factors like outdated technology, inefficiencies, low value-addition, small size of factories, etc.
“Besides, the government’s bias for imports rather than support for local manufacturing, inconsistent export policies, overvalued rupee, taxation, higher cost of doing business, etc have worsened the situation.”
Ibrahim Fibres’ executive said the domestic industry was internationally competitive in spite of being at a very large cost disadvantage because of higher energy prices, higher freight cost, increase in duty to 5pc from 3pc on import of raw material (PTA), underdeveloped upstream petrochemical industry, unskilled workforce, and poor infrastructure compared with the other regional players.
“But we need higher anti-dumping duties and tariff protection to compete with Chinese dumping. India has provided 10pc protection to its industry and Korea 8pc. Why can’t we have higher protection?” he concluded.
Published in Dawn, Economic & Business, April 17th, 2017