25 June 2012 00:00 [Source: ICB]
Indian polyester producers face turbulent times as excess capacity and a slowing economy have dragged down demand and profitability.
Producers are complaining that their margins have been squeezed since April 2011 and the situation has not shown any improvement this year.
An inflation rate of 6-8% has hit sales of polyester
A source from a second polyester company complains: "Margins are negligible now; we can barely cover costs. No one is making money in polyester chips; margins for yarn are also bad but better for staple and bottle-grade chips"
ECONOMIC SLOWDOWN HITS DEMAND
India's economic woes are hurting polyester demand. The economy is estimated to have expanded by around only 7% in the year ended March 31, 2012; falling short of the 8% plus growth recorded in the previous two years. A weak coalition government has been battling a number of problems, including a widening current account deficit, currency depreciation and high inflation (see page 34).
The current account deficit was at 4.3% at the end of 2011, up from 2.3% a year earlier. And the rupee has depreciated by more than 20% in the past year. Foreign investor confidence in the economy has weakened as much-needed economic reforms have been put on hold.
Standard and Poor's (S&P) revised its credit rating outlook on India to negative from stable in April and other rating agencies could follow. Reforms are urgently needed to kick-start the economy, but this seems beyond the power of the government as it is unable to drum up support from its coalition partners.
The near-term outlook remains bleak as the fragile economic environment could continue until 2014 when the next general elections take place, say industry players.
One of the key concerns for polyester producers is inflation, which has been running at 6-8% for more than a year. That 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.
Besides the economy, a third producer also cites rampant capacity expansion in the past couple of years as a factor behind the current margin pressure. Expansion in polyester has been outpacing that of the downstream spinning and textile sectors.
"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%," he points out.
Spinners looking to back integrate operations have been responsible for most of the capacity additions courtesy of the availability of cheap equipment and technology from China on easy financing terms.
"Cheap Chinese equipment has made all the difference; Indian companies have got financial help from China as equipment has been procured on delayed payment schedules. It has been possible to set up a polycondensation line with an investment of only around Rs1,200m Indian rupees [$21.75m]," he adds.
Given the anemic domestic market polyester producers have been forced to boost exports despite lower realization.
CHINA ADDS PRESSURE TO MARKET
But China too has been adding polyester capacity and has emerged as a major exporter, selling 788,000 tonnes of polyester staple fiber (PSF), 668,000 tonnes of polyester filament yarn (PFY) and 956,000 tonnes of polyethylene terephthalate (PET) bottle-grade chips in the international market in 2011.
And exports volumes are likely to rise this year as nearly 6.65m tonnes/year of new polyester capacity is due to be brought onstream at a time when Chinese demand is expected to expand by 3m tonnes.
The demand slowdown in both China and India comes as key polyester raw materials purified terephthalic acid (PTA) and monoethylene glycol (MEG) face upward price pressure.
In the case of PTA, nearly 16.2m tonnes/year of capacity, mainly in China, is due to be added during 2012-13. PX capacity additions of around 3.5m tonnes/year during the same period are far lagging behind and its availability and price are likely to be a major bottleneck for PTA producers. MEG faces similar constraints and the product is expected to be in short supply for the next couple of years.
Many Indian polyester producers concur that the local industry faces the prospect of painful restructuring. Some believe that non-integrated players and those with heavy exposure to polyester chips are the most vulnerable, but a source from Garden Silk, 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 at a time when raw material are projected to be in short supply. 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.
Many of the new players are integrated to spinning lines but produce only semi-dull chips; some of the small players may prefer to buy chips and shut their polymerization operations during some periods, he adds.
But some of the smaller players are 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 the bigger producers," states a source from Sumeet Industries, which is commissioning a new texturised polyester yarn facility. The company's main products are partially oriented yarn (POY) and fully drawn yarn (FDY).
This is not the first time that the Indian polyester industry has faced painful restructuring. Rampant expansion in the early 1990s had brought the industry 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.
EXPANSIONS ON HOLD
But whether the industry major will have to step in again and whether it will have the appetite to repeat the exercise remain to be seen. Meanwhile, given the weak profitability and uncertainty in demand some companies will have to phase out future expansion plans and signs of this are already evident.
"We are looking at the market and phasing out the commissioning over a longer period of time," says a source from Wellknown Polyesters, which is building a new 216,000 tonnes/year polycondensation unit.
The Garden source says the firm has put on hold plans for expansion in PSF and delayed delivery of a 36,000 tonnes/year polyester film line for a year. These projects are likely to come up only after 2013, says the source.
But Reliance, which is integrated both upstream and downstream, is well placed and pushing ahead with massive expansion plans (see table) in polyester and its raw materials.
It is also confident of the fiber's long-term prospects and expects demand to rise at around 10%/year. This was echoed by JBF Industries, which forecasts a demand growth of 12% in 2012 and 10-11% in the coming years.
JBF is building upstream PTA capacities in the wake of insufficient local PTA supply, which has restricted polyester production growth in 2010-2011. It aims to bring on line its 1.12m tonnes/year PTA plant in Mangalore in the fourth quarter of 2014 or early 2015.
"We have got land and got clearances from the government. Financing [for the project] is being tied up. We are concluding on technology in two to three months," says a source from JBF.
Despite the near-term uncertainty, other producers remain optimistic about the long term as polyester is the only fiber capable of meeting the clothing needs of the millions of poor people in the country.
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