Lotte Pakistan PTA Ltd - Tariff revision is imperative for our survival: CEO Lotte Pakistan PTA

BR Research: Would you take us through the history of Lotte Pakistan and the business operations?
Asif Saad: We are a world class producer of PTA and we consider ourselves the backbone of synthetic textile chain. We started with a capacity of 400,000 tons, which was de-bottlenecked gradually to the current capacity of 0.5 million tons.
ICI Pakistan had built this plant with an investment of $500 million. The plant started operations in 1998 and it was initially under ICI Pakistan. In 2000, the Company was de-merged from ICI Pakistan due to ICI's global exit strategy from the PTA business. The sale of Pakistan PTA was fast tracked once ICI was acquired by the Dutch Company Akzo Nobel in 2008. Pak PTA was acquired by Lotte group in 2009.
Ever since our acquisition by Lotte, we have renewed our commitment to invest and we have demonstrated our commitment by investing over $130 million including a co-generation power plant, which is going to generate 40-45MW electricity.
As far as our role in Pakistan's economy is concerned, we save around $100-150 million per year in terms of foreign exchange; we bring state of the art technology to our country and provide employment and income opportunities to thousands of Pakistani families.
If you look within the polyester chain, you will see that local value addition is the highest in PTA manufacturing. Main usage of PTA is in synthetic textiles, which contributes more than 70 percent of PTA consumption with the balance coming from PET resin (used in making packaging for water, juices, etc).
The market demand for PTA is approximately 650-700,000 tons per annum. Ibrahim Fibres, Novatex, ICI, Rupali and Pak Synthetics are our clients. We estimate that the PTA market in Pakistan will grow at 8-10 percent per year in the coming years. BRR: Tell us about your plant safety standards and operational efficiency.
AS: We have an exemplary safety record at our site and this is something we are extremely proud of. Our plant in the last 12 years has not had any major accidents, stoppages or hiccups. PCI-one of the best known consultants in this industry commented on this performance that this plant is probably one of the best managed ones in the world in these aspects.
Our plant availability is about 95 percent which means we have not had outages and stoppages. Our market share is 80 percent, which makes the customers heavily dependent on our plant availability and I am proud to say that we have never let our customers down despite the fact that plant breakdowns are known to occur in this industry.
When we started, we were buying our raw material from Europe, Korea and US which required more storage and incurred high freight costs. However, now the Middle East is getting into Paraxylene production, which provides us a much better position to buy raw material and enhances our efficiencies. However, despite these efficiencies our cost in Pakistan remains much higher mainly due to the infrastructure cost.
BRR: What is the development on the tariff protection issue?
AS: The biggest hurdle that we face in the way of growing and integrating our business is the PTA expansion plan. When we started the operation in 1998, the government agreed to a guaranteed tariff protection of 15 percent after negotiations.
In 2008, the National Tariff Commission (NTC) did a study which recommended that the tariff on PTA should be 10 percent. But the government insisted on 7.5 percent and we had to agree to that. In 2009, when the acquisition took place, the tariff was 7.5 percent. In 2010, there was another review in which the NTC recommended 4 percent which we protested against strongly but much to our surprise the government went one step ahead and slashed it to 3 percent!
This is a fiasco as far as we are concerned because it left the owners shocked as it happened so quickly after the acquisition and all the valuations and projections were done on 7.5 percent. All of a sudden we are sitting in an environment where we are the least protected industry in this country! If I am not mistaken, industries which have started in Pakistan much before us enjoy much higher protection levels.
We believe we have the most critical raw material in this value chain, we add the highest value, we have the highest capital requirements and we use the most complex technology, yet we remain the least protected!
When we gave our rationale to the government, we said let's look at the relevant markets like China and India where the growth in the whole chain is multiplying. China has PTA at 6.5 percent with a capacity of 16 million tons and is growing rapidly.
People who understand this chain know where the value addition is but in Pakistan the whole thing is so lop-sided. There is a concept called 'cascading' which the NTC takes as the philosophy in Pakistan. The analogy is that the protection at petrol pump should be more than the refineries, which is ridiculous.
Our detractors argue that we were given protection enough for 10 years, therefore, there is no point continuing it anymore. But our contention is that why do you single us out? And what support are we asking for?
What policymakers must understand is that producing a commodity is a cyclical business. We can lose money in a year more than what we made in three years. We cannot control prices in the commodity business, so you cannot say that because you made so much money in three years, you cannot be given a higher tariff.
Our customers have the choice of importing PTA from the region and they will do so at international price. Our sales contracts state that the PTA price will be pegged to the Chinese CFR price. If the price crashes in the Chinese markets, our prices go down too, we are very susceptible to the global market.
We have suffered for almost two years with this 3 percent tariff and this wasted time has discouraged our owners so much that they are seriously considering moving this project elsewhere. And, if that happens, it will be really sad for this country. We want to invest in this country; we want to grow and provide a showcase for other people to invest in this country. Even the symbolic value of $500 million investment in these times is much more which the government needs to value.
There is a proposal with the Board of Investment which clearly states that our tariff should be reverted to 7.5 percent in addition to providing some tax related benefits. Lotte is prepared to start building the new plant in 2012 provided our proposal is accepted. We remain hopeful but there are strong lobbies in the value chain, which join hands and corner us. We hope that this time the government is able to see the economic rationale and the bigger picture for the sake of our country.
BRR: What is the position of various government bodies influencing the import tariff decision?
AS: The Board of Investment in Pakistan has been very supportive of our situation and is the only government body which has understood our predicament and has taken a stand with other government ministries on our issues.
Even when our import tariff was reduced to 3 percent in 2010, it was done despite strong protests by BOI. Over the last year we have seen Planning Commission bring out this tariff structure report which, at a policy level, recommends to the government to do away with this "cascading structure" philosophy. We have tried to explain our logic to Finance, Commerce and Textiles ministries-all of which understand our logic and cannot deny our reasonable requests.
Those who argue against us have no economic rationale in their arguments and only claim that we have made much money in the last 3 years! If that is a crime in Pakistan-I am afraid there should be many other industries which should be penalised first!
In fact, the government should be highly supportive of manufacturing companies in the organised sector which have good profitability and who are reinvesting their earnings in Pakistan.
BRR: Will there be enough demand if and when your plant of one million tons is operational?
AS: The demand right now is 0.7 million tons and we see it rising to 0.9 million tons by the time of expansion. The rest we plan to export for a few years until the domestic demand catches up with supply. Even when we export, the country will generate about a billion dollars in foreign exchange earnings. And because we will have bigger size, we will be more competitive and committed.
BRR: How long are the owners willing to wait for?
AS: They are certainly waiting till the end of this year and that is the timeline that we have been very vocal about. Beyond that, we are not sure. They were almost gone; we have literally held them back for some more time. They can go to Saudi Arabia for instance and put a plant there, infrastructure is there, there is no tax; environment is conducive there.
BRR: How do you look at the government's decision to grant the MFN status to India? How will it impact the local industry especially the local PTA producer?
AS: Pakistan's decision to grant the MFN status to India is a positive gesture and will work towards bringing about mutual co-operation between the two nations. For your information, Lotte PTA already has considerable trade with India and we support any move to enhance this relationship. However, the impact of such a decision on the local industry should be kept into perspective, safeguarding the interests and the productivity of the local industry should be of utmost priority for the Government of Pakistan.
As far as local PTA is concerned, two things need to be kept in mind. First, the import tariff on PTA in India is 5 percent as compared to 3% in Pakistan. This difference of 2% means an Indian plant of our size will have a benefit of 12-15 million dollars per year and can use this benefit to engage in selling to Pakistan. Hence this supports our basic argument for import tariff increase. Second, if Indian PTA comes in via Wagah border, it will have a logistical advantage over our plant based at Port Qasim.. Again, the local industry is likely to suffer as a result of this.
Therefore, for PTA, we will require tariff enhancement and also that import via road is not allowed. Once on an even playing field, we have no issues competing with Indian product as we do with other countries.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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