FocusLotte Pakistan seeks level playing field ahead of investment

10 October 2011 07:23  [Source: ICIS news]

By Tahir Ikram

SINGAPORE (ICIS)--The fate of Lotte Pakistan PTA’s (Lotte PPTA) investment to expand its purified terephthalic acid (PTA) capacity to 1.5m tonnes/year in the country depends on the government’s decision to increase import tariffs to protect the industry, a company executive said over the weekend.

The company, which has a 500,000 tonne/year plant in Port Qasim, located 50km (31 miles) outside the industrial port city of Karachi, is planning to spend up to $500m (€375m) on the expansion, Asif Saad, the CEO of Lotte PPTA, earlier told ICIS.

Pakistan’s Board of Investment (BOI) earlier this year requested the company, the only PTA maker in the country, to submit a proposal to undertake the expansion, according to Saad.

“We have explained in this proposal that PTA, being a cyclical commodity business, needs a minimal amount of government support in the shape of tariff protection,” Saad said.

“In our view, the [import] tariff for PTA in Pakistan should be set at a minimum of 7.5%. The current import tariff at 3% is not sufficient to protect Pakistan’s only PTA plant, while other countries with more competitive cost bases provide higher protection,” Saad added.

Lotte PPTA wants the import tariffs should be benchmarked with countries where PTA production and demand are growing, and that have similar industry structures.

The PTA tariff in the EU is at 6% and the tariff in China is 6.5%, while India’s tariff stands at 5%, Saad said.

“In addition, we must analyse the cost base in Pakistan, which is at least 20% higher than in these countries. Only our logistic costs are 50% higher than those in India and China, thanks to state-granted monopolies to terminal operators,” he added.

With the current margins of Pakistani PTA producers at the lowest in the last two years, “the severity of the commodity cycle makes an investment decision, without adequate protection, a very difficult one,” Saad said.

Government officials could not be immediately reached for comment.

According to Karachi-based brokerage house Topline Securities, the current margins of international PTA makers are at around $120-125/tonne (€90-94/tonne) because of higher PX prices amid supply disruptions in Asia and declining PTA prices as a result of the ample supply of cotton in the country.

PTA goes into the manufacture of polyester fibre, which is used by the country’s large textile industry. However, the industry primarily uses cotton, so when cotton prices rise, the demand for cheaper polyester thread increases.

The current margins of domestic PTA producers are at Pakistani rupees (PRs) 14,900-15,200/tonne ($171-174/tonne), with the difference resulting from a 3% duty protection, Topline Securities said.

However, the primary margins of global PTA producers for the outgoing September quarter averaged at around $220/tonne, which translates to Rs23,800/tonne for PTA producers, such as Lotte Pakistan PTA, said Furqan Punjani, a research analyst at Topline Securities.

The average margin for international PTA makers in the last five years has remained at around $250/tonne and a healthy margin, “despite it being a subjective term”,  should be maintained at $225-250/tonne, Punjani added.

According to Lotte PPTA, the country’s market size will be at about 900,000 tonnes in three years’ time, when the company’s starts up its expansion.

“This means we should be able to sell about 70% of the company’s expanded capacity in the domestic market and export the remaining volume until domestic demand catches up,” Saad said, hoping the government will agree to the proposal.

“This scale of investment in the manufacturing sector will not only bring significant financial benefits to the country, but also raise Pakistan’s image in the international market,” Saad added.

Pakistan needs direct foreign investment to reinvigorate its weak economy, which has been suffering partly from violence and militant attacks, and improve its international business image.

From a peak of $5.27bn in investments in July 2007-June 2008, foreign investment in the country has fallen to just $1.57bn in July 2010- June 2011, according to the BOI.

In the first two months of the current fiscal year up to August 2011, only $112.4m has been invested in the country, the BOI said on its website.

The total PTA demand in cotton-growing Pakistan in 2010 was estimated at around 700,000-750,000 tonnes, according to Topline Securities.

The annual growth in demand for PTA is estimated at 8-12% for the next few years, in line with the country’s shift towards polyester from cotton, Topline Securities estimates.

Panjani said there is a growing trend in China and India to use more polyester fibre as it is cheaper compared to cotton. As a result, the textile industry in Pakistan is following this trend.

Around 200,000-250,000 tonnes of PTA was imported by Pakistan in 2010 and the country is expected to import around 330,000-360,000 tonnes in 2011, Topline Securities said.

Any move by the government to lower the PTA tariffs will be strongly resisted by the country’s All Pakistan Textile Mills Association (APTMA) lobby, industry sources said.

Pakistan relies heavily on its cotton and textile sectors, which make up almost half of the country’s manufacturing base.

The cotton and textile sectors account for 11% of the country’s GDP and about 60% of its export receipts, Topline Securities added.

According to Punjani, there is a small chance that the government will agree to increase the import tariff for PTA as the APTMA is likely to oppose it and because the general trade policy is aimed at lower tariffs.

“Over the last few decades, the government of Pakistan has pursued a liberal trade and import policy, where we have seen the government reduce its protections from many industries, Punjani said.

“That is why we believe that chances of the government increasing the protection for the local PTA producers are small,” Punjani added.

However, Lotte PPTA will move the project elsewhere if this happens, Saad said.

“[If] the Pakistani government does not address the [import tariff] issues, the company will move the PTA project to another location in the Middle East. A couple of possibilities are being explored,” Saad added.

Lotte, the South Korean conglomerate, acquired the majority share holding in Pakistan PTA Limited (PPTA) in September 2009.

The name of the company was subsequently changed to Lotte Pakistan PTA (Lotte PPTA), according to company’s website.

In addition to the investment in its core PTA business, Lotte invested $50m in a captive power plant in Pakistan, which is currently under construction, and acquired a local confectionery company in 2010, Saad said.

($1 = €0.75, $1 = PRs87.33)

For more on PTA, visit ICIS chemical intelligence
Please visit the complete ICIS plants and projects database
Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections 

By: Tahir Ikram
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