INSIGHT: India’s polyester industry struggles with excess capacity

18 June 2012 16:14  [Source: ICIS news]

By Malini Hariharan and Becky Zhang

MUMBAI (ICIS)--India’s polyester industry is in the doldrums with producers struggling to cope with lacklustre demand and squeezed margins.

Operating rates have been cut and were at around 60-65% last week, down from 70-75% in May.

The anticipated recovery in buying ahead of the peak demand season in July-August has failed to materialise as a decline in prices of raw materials purified terephthalic acid (PTA) and monoethylene glycol (MEG) in the past few weeks prompted buyers to retreat until markets stabilise.

Asian MEG and PTA prices have dropped by 13-14% and 19-20% respectively over the past one month.

The Indian polyester market has tracked that of China which has seen sales-to-output ratios at polyester plants drop from 70-80% in May to 50-70%. Operating rates have also been lowered to 78% from 81% two weeks earlier.

India’s economic woes have aggravated the problems for local polyester producers.

One of the key concerns for producers is inflation, which has been running at 6-8% for more than a year.

Inflation has hurt demand as the priority for people has been food over clothing and the impact of this has trickled upwards to dampen polyester demand, say producers.

And the near-term outlook remains bleak. Inflation accelerated in May and was reported at 7.55%, making it difficult for the Reserve Bank of India to introduce interest rate cuts that are urgently needed to kick start the economy.

The industry also has itself to blame for its current woes. Rampant capacity expansion has added to the margin pressure.

“Indian polyester capacity increased by 30% in fiscal 2011-12 and will rise by another 40-45% by the end of fiscal 2012-13. Demand during this period is likely to grow by only 15-18%,” points out one producer.

Spinners looking to back integrated operations have been responsible for most of the capacity additions. The availability of cheap equipment and technology from China on easy financing terms helped them implement this strategy.

Profitability in the Indian polyester business is likely to remain under pressure for the next few years and this has prompted some companies to defer their expansion plans.

For instance, Wellknown Polyesters plans to phase-out the commissioning of a new 216,000 tonne/year polycondensation unit.

And Garden Silk has put on hold plans for expansion in polyester staple fibre and also delayed delivery of a 36,000 tonne/year polyester film line for a year. These projects are likely to come up only after 2013, says a company source.

But Reliance Industries, which is integrated both upstream and downstream, is pushing ahead with massive expansion plans in polyester and its raw materials.

This is likely to put further pressure on the industry, especially on the smaller non-integrated producers.

Many producers believe that the industry will have to go through yet another round of painful restructuring.

Rampant expansion in the early 1990s brought the market to its knees and recovery came only after Reliance Industries stepped in to acquire a number of small polyester companies and helped consolidate a fragmented industry.

However, there is no unanimity now on which companies will emerge as winners.

Many believe that the non-integrated producers with heavy exposure to sales of polyester chips are most vulnerable.

But the source at Garden, the largest producer and seller of polyester chips in the country, disagrees.

“We are also the largest buyer of PTA and MEG in the country and that offers advantages. Small producers may not be able to get PTA and MEG at the right price and so we will always be competitive.

“We also have a full range of chips [to offer]; we can sell volumes despite the margin squeeze,” he points out.

Some of the smaller players are also confident of survival.

“A small company can quickly adapt to market conditions. Additionally we are located at Surat which is the heart of the Indian polyester market; we are much more flexible than bigger producers,” states a source from Sumeet Industries which is in the process of commissioning a new texturised polyester yarn facility.

The next few years promise to be challenging for the polyester industry. But for now, producers are pinning their hopes on polyester’s long-term prospects, especially its role as an affordable fibre that can meet the needs of the common man.

In the long run, Indian demand is expected to recover and grow by at least 10%/year.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Malini Hariharan
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