Long road to recovery

31 January 2000 00:00  [Source: ACN]

Indian polyester industry, buoyed by the prospect of rising demand, has embarked on a painful but inevitable process of consolidation. Prema Viswanathan finds out how the industry is bracing itself for a gradual recovery

Indian polyester producers and industry observers expect in the next five years to see a slow but steady rebound from the all-time lows the industry experienced during the second half of the 1990s. Fuelling their hopes is the anticipation of a sustained 12% growth in domestic demand. They also expect margins to strengthen, with prices of polyester, over the past year, having risen by 30-40% to reach three-year highs.

The strengthening of demand and prices has given a boost to the industry's latest initiatives in capacity consolidation and cost reduction, industry analysts believe. The moves, which have been spurred by the polyester players' need to be more competitive on the domestic and global fronts, are finally beginning to yield results, they say.

The consolidation moves are, however, likely to benefit only a few big players currently dominating the polyester industry, such as No1 producer Reliance Industries, and No2 Indo-Rama Synthetics (India), the analysts admit. Smaller producers will have to bear most of the pain of restructuring, these analysts say.

'Those with small capacities below 30 000 tonne/year will find it increasingly difficult to survive in coming years, and are likely to be taken over by those with a larger marketshare,' says one Bombay-based analyst. This is a painful but inevitable option, he points out, if the Indian polyester industry is to face up to global competition, with the domestic market opening up increasingly to foreign players and import tariff barriers steadily coming down.

'The upside of this is that the consumer will benefit. The dominant Indian players will be forced to keep prices at levels compatible with Asian prices,' he adds.

The government has pursued its own strategy to forestall market domination by a few big producers by coming to the rescue of the sick segment of the industry. Some of the small companies, such as Indian Polyfibres, had approached the Board for Industrial and Financial Restructuring (BIFR), set up by the government under the Sick Industrial Companies (Special Provisions) Act, to aid the rehabilitation of loss-making companies (ACN 5 Oct 1998, p39). The government's plan was for these companies to finance their turnaround through loans from banks and financial institutions, failing which they could approach the corporate sector for a cash injection.

However, the takeover last year of Indian Polyfibres by Reliance is an indication that the BIFR has not been as effective as expected in helping sick companies resuscitate themselves, points out a source in a financial institution.

The government has also been seeking to restructure the state-owned units in the industry. But this has been a slow process, say analysts. State-owned National Textile Corp (NTC), which last year put up for sale the 12 000 tonne/year Swadeshi Polytex, revealed earlier this month that its three-pronged restructuring strategy would include offering a voluntary retirement scheme (VRS) to its workers in 80 NTC-run textile mills declared unviable by the government. Minister for Textiles Kashiram Rana further announced that Rs30bn (US$688.7m) would be offered by the government for modernisation and the VRS scheme. However, he ruled out the privatisation of NTC, much to the disappointment of industry analysts.

Upgrading of technology is another route through which loss-making producers can modernise and turn competitive, analysts say. The Association of Synthetic Fibre Industry (Asfi) has therefore demanded that the government's fund for upgrading technology be extended to the synthetic fibre and yarn industry to help it consolidate the restructuring agenda it has set for itself.

'This industry started in India 37 years ago. Many units are old, and need to be modernised to be competitive in today's globalised market. So far, the fund for upgrading technology has been made available only to the weaving, spinning and texturising industry.

'It is therefore essential that this fund be extended to the synthetic fibre/yarn industry,' Asfi says in its memorandum ahead of the 1999-2000 Indian Budget to be presented at end-February.

Even the big players expect to face an uncertain future. Producers caution that the industry's recovery is still at a very embryonic stage, and could be reversed if the government does not support their efforts to maintain competitiveness.

Asfi has, in its Budget memorandum, sought from the government cuts in domestic duties on polyester and a two-year delay in planned reductions in import tariffs (see p10).

Support from the government will help the industry push ahead with the restructuring initiatives that have already begun to impact on polyester players' efficiency and profitability, Asfi believes.

The restructuring has been made possible by recent efforts to consolidate the fragmented capacities that have characterised the Indian polyester industry since the mid-1990s. For example, in the last five years, as many as 10 polyester filament yarn (PFY) units with a total capacity of 146 900 tonne/year have shut down, three of them in 1999 alone.

In the case of polyester staple fibre (PSF), four units have shut down in the last 10 years, three in the latter half of the 1990s. Some of these units have been taken over by producers with a larger marketshare.

Most significant among these initiatives is the acquisition last year of 66 000 tonne/ year polyester filament yarn (PFY) producer Raymond Synthetics by Reliance, its fourth in the last year. Reliance, the only totally integrated polyester producer, earlier acquired controlling stakes in PSF producers ICI's 32 000 tonne/year Terene Fabrics and India Polyfibres' 24 400 tonne/year unit and in Orissa Synthetics' 43 000 tonne/year PSF and PFY facilities (ACN 4 Oct, p6).

Reliance is also close to concluding a deal for the acquisition of JCT Ltd's PSF unit, JCT Fibres, ACN understands (ACN 27 Dec/3 Jan, p11). If this deal goes through, it will reduce the number of PSF players in the 617 000 tonne/year segment to four from eight only a year ago.

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Close on the heels of the acquisition of Raymond Synthetics by Reliance came the announcement late last year of the country's first consolidation in the polyester film sector. The loss-making 24 000 tonne/year Flex Industries and 15 000 tonne/year Polyplex Corp announced in November that they were merging to form the country's largest polyester film producer, called United Film Technologies (ACN 1 Nov, p5).

This consolidation, which has reduced the number of players to seven from eight, is expected to trigger a much-needed rationalisation in the 126 400 tonne/year polyester film segment.

The rationalisation has been driven chiefly by overcapacity. 'Capacities for film and polyethylene terephthalate (PET) far outstrip current domestic demand and hence exports are essential for many years to come,' points out PV Kuppuswamy, executive director, Bombay Dyeing.

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However, the situation is expected to change after 2005, when demand for film and PET is expected to rise by 10%/year, rising to 153 000 tonne/year by 2010 for film and to 126 000 tonne/year for PET, he said.

In the case of PSF and PFY, current projections indicate the demand-supply situation is far better. The surplus has been narrowing steadily, with supply outstripping demand currently by 100 000 tonne/year for PSF and 180 000 tonne/year for PFY. Demand for PSF and PFY is expected to grow by 11% annually from 2000 to touch 915 000 tonne/year by 2005 for PSF and 1.4m tonne/year for PFY.

However, given the current situation of oversupply, it is still too early for complacency.

It had become apparent in the last two years that urgent steps needed to be taken to stem the proliferation of small players in the polyester industry, battered as it was by the collapse of margins worldwide, analysts say. The quickest to react was the 617 000 tonne/year PSF segment. More than 58% of PSF marketshare is in the hands of just one player - Reliance, with a PSF capacity of more than 350 000 tonne/year. The sector's next biggest player is Indo-Rama, which controls 21%. The remaining 18% is shared by four players. Three of these have shut down since 1998.

The PFY sector has been slower in rationalising capacities, with 29 players sharing a total capacity of close to 916 000 tonne/ year. Among them, Reliance has the largest marketshare with 35%, and Indo-Rama the second largest with 11%. The remaining 27 players share 54%.

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As many as 10 of the 29 players are currently shut down, constituting a capacity of 146 879 tonne/year. The only PFY consolidation in the last year has been Reliance's acquisition of Raymond Synthetics' 66 000 tonne/year facility.

Other consolidations expec-ted in the polyester industry include the anticipated sale of Indian Organic Chemicals, with a capacity of 36 000 tonne/year.

Driving these consolidations has been the squeeze on margins the polyester sector witnessed over the last two years, exacerbated by the Asian crisis.

In recent months, however, margins have picked up, although the rise in PSF and PFY prices have been accompanied by a surge in raw material costs.

Indian polyester players had earlier feared that the rising prices in Q3 and Q4 1999 would soften by Q4 (ACN 21 June, p47). Fortunately, these fears were belied. Far from weakening, prices of PSF and PFY have soared to levels not seen since 1996. PSF prices have risen at an average rate of 40% to last month touch Rs89.28/kg for 115-126 denier and Rs79.84/kg for 230- 245 denier. Prices of PFY for all grades rose by 30% in the same period, touching Rs70.06/kg in December.

Prices of fibre intermediates, however, have also risen concurrently, offsetting to some extent the rise in polyester margins.

Last June, with the turnaround season heading to a close, producers had anticipated a fall in fibre intermediate prices (ACN 21 June, p46). Instead, prices of purified terephthalic acid/monoethylene glycol (PTA/MEG) have surged. PTA prices have risen by more than 35% to Rs36.89/kg, and MEG to Rs40.60/kg. This has put some pressure on margins, said Asfi secretary-general SC Kapur.

'We have to take into account, however, that PTA/MEG costs contribute only 50- 60% towards the production costs of the polyester players,' he added.

The improved margins have been reflected in the buoyant balance sheets of Reliance Industries, Indo-Rama and Century Enka. Reliance announced last week that its net profit for the first nine months of 1999-2000 is Rs17.4bn, up 32% over the same period the previous year. Its operating profit Rs31.5bn was up by 28%.

The improvement in Indo-Rama's financial performance has been even more dramatic. The company expects to break even for the full year ending 31 March 2000, reversing earlier losses. Indo-Rama's operating profit for H1 of the current financial year has more than doubled to Rs11.2bn. The company also recently secured a two-year moratorium on its debts to Indian financial institutions. Indo-Rama's total debt amounts to US$325m (ACN 10/17Jan, p5). Century Enka performed even better, recording a 1156% rise in net profit to Rs189.7m for H1 ending 30 September (ACN 15 Nov, p9).

The upward trend in product prices and the improvement in the financial performance of polyester players should not, however, lead to a let-up in the consolidation intitiatives, analysts caution.

The improved margins could help smaller players survive in the short term, a second Bombay-based analyst says.

'However, it would be hard for them to in the longer term hold out against the big players in the sector. They may find themselves faced with no option but to sell their loss-making assets,' he adds.

Even some big players have been opting to exit or desist from entering the sector while the going is good. For example, Indian Petrochemicals Corp Ltd (IPCL) recently decided to exit the aromatics segment because it realised there was no point in going further up the polyester chain along the paraxylene-PTA route.

'We feel the entry barriers are too high in the polyester segment. It is only the already strong players who can go from strength to strength,' says IPCL chairman and managing director KG Ramanathan.

Among those who are cheering the restructuring initiatives loudest are the Indian financial institutions, which had in the mid-1990s granted Rs400bn in loans to the polyester sector.

Some of these loans are likely to turn into non-performing assets if the industry does not turn around, warns a senior official in one creditor institution which has considerable exposure to the industry. 'But I think better times are ahead for the survivors of the 1990s downturn. Things can't get any worse,' he points out.

Indian PSF industry 1999-2000*



Producer Capacity Market
share (%)
Reliance Industries 359.4 58.2
Indo-Rama Synthetics 132.3 21.4
Others (BRPL, JCT and 126.0 20.4
Indian Organic Chemicals)
Total 617.0 100


Source: Association of Synthetic Fibre Industry * '000 tonne/yearIndian PFY industry 1999-2000*

Producer Capacity Market
share (%)
Reliance Industries 326.0 35.6
Indo-Rama Synthetics 105.0 11.5
DCL Polyester, Modern Petrofils, 187.1 20.4
Nova Petrochemical and Sanghi Polyester
Others (22 companies) 297.9 32.5
Total 916.0 100


Source: Association of Synthetic Fibre Industry * '000 tonne/year

Polyester chain demand projections*



Product 1999-2000 2004-05 % CAGR 2009-10 % CAGR
PSF 582 915 11 1280 7
PFY 917 1400 11 1960 7
Polyester film 126 95 12 153 10
Polyester resin 170 78 15 126 10
Total
Polyester 1795 2616 9.1 3554 7.1
PTA / DMT 1800 2328 5.8 3163 7.1
Monoethylene glycol 550 916 13.3 1244 35.8
Paraxylene 1645 1583 (3.7) 2151 35.9


PTA / DMT = purified terephthalic acid / dimethyl terephthalate * '000 tonne/year

CAGR = cumulative annual growth rate

Source: Chemical and Petrochemical Manufacturers Association

PSF units under shutdown



Producer Capacity* Month/Year
Calico 7.9 April 1989
Indian Organic 34.0 May 1995
Chemicals
JK Synthetics 13.0 October 1997
Swadeshi Polytex 14.0 October 1998
Total 68.9


* '000 tonne/year

Source: Association of Synthetic Fibre Industry

PFY units under shutdown



Producer Capacity* Month/Year
Orkay Indusries 30.0 June 1997
Modern Petrofils 29.0 October 1998
Prag Bosimi 25.0 December 1997
Baroda Rayon 15.2 May 1999
JK Synthetics 15.0 October 1997
Indian Organic 9.2 May 1995
Chemicals
Garware Rayon 4.5 August 1996
Nirlon 3.5 July 1999
Yogi Polyester 3.5 January 1999
Total 146.9


* '000 tonne/year

Source: Association of Synthetic Fibre Industry





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