The Competition Commission of Pakistan (CCP) has recommended that the implementation of the anti-dumping law needs to be strengthened to safeguard the Polyester Staple Fibre (PSF) industry and tariff structure for the PSF industry should be carved to provide the industry and potential entrants long term visibility for future planning and growth.
This has been specified in the CCP competition impact assessment report on Polyester Staple Fibre Industry of Pakistan released on Wednesday. The report said that the sector is directly affected by the developments in the textile industry. Pakistan's textile exports have fallen during the last three years; consequently the derived demand for PSF cannot be expected to remain stable. The cost of doing business is rising in Pakistan. In particular, the energy costs are not competitive compared to other PSF manufacturing countries in the region. Low tariffs and weaknesses in the application of the trade remedy law, ie the anti-dumping mechanism, have exposed the PSF sector to unfair foreign competition.
The CCP recommended that the development of the textile industry is a pre-condition to boost the derived demand for PSF. The textile sector needs a stronger image and market development strategy. In particular, targeted efforts are required to check the rise in investors' negative perception of political instability and its associated impact on investment and sourcing decisions.
The effective negotiations are needed to reduce access costs to major markets within the WTO framework or through bilateral arrangements. Efforts are required to establish long term competitiveness of the textile industry, focusing on the entire value chain including PSF. The economies of scale impact the cost of production. Therefore, to reap the benefits in the form of elevated efficiency and productivity, the PSF sector needs to improve its scale of production and technology profile. This will also enable the sector to better meet PSF demand.
The commission further recommended that the tariff structure for PSF industry should be managed so as to provide the industry and potential entrants long-term visibility for future planning and growth. The CCP said that the disclosure of sensitive cost information through company websites is competition reducing in its effect. Therefore, the SECP needs to work out an alternate mechanism to collect necessary cost data. The CCP may consider giving its advice in the form of a policy note.
The report identifies key challenges to Pakistan's PSF sector that need to be addressed promptly. The sector is directly affected by the developments in the textile industry. Pakistan's textile exports have decreased during the last few years; consequently the derived demand for PSF cannot be expected to remain stable.
The report said that the textile sector contributes about 55% to Pakistan's export earnings and polyester staple fiber (PSF) is one of the crucial raw materials in the textile value chain. PSF is a type of man-made fiber that is used in spinning for yarn manufacture, which is later woven into value-added textiles. Since the early eighties, PSF manufacturing has been contributing to Pakistan's economy and saved about $225 - 250 million annually for the country on account of import substitution.
The report draws on observations made by the PSF producers, for which a comprehensive survey was conducted in July 2010. Based on the survey findings and information gathered from a range of stakeholders, recommendations have been chalked out to improve competition in the sector. The CCP observe that an assessment of the competition dynamics of the sector does not call for action by the CCP.
The CCP's major conclusion is therefore 'do nothing' with reference to Competition Act, 2010. The supply side of the polyester industry in Pakistan consists of five producers that meet about 80% of PSF demand with an installed capacity of about 642,600 tones per annum. These units are ICI Pakistan Ltd, Pakistan Synthetics Ltd, Ibrahim Fibres Ltd, Rupali Polyester Ltd. And Dewan Salman Fibres Ltd. However, presently only 4 units are operational as Dewan Salman Fibres Ltd, a former market leader, has ceased operations.
Initially, the industry was protected through import tariffs of about 25% till 1990. Since then, the tariffs have been reduced gradually to 6.0 percent in 2010-11, implying that the sector faces increased foreign competition. Besides this, the dumping of PSF is also affecting the local industry. After determination of dumping in certain cases, the National Tariff Commission (NTC) imposed anti-dumping duties. Our study also substantiates NTC's determination of PSF dumping into Pakistan. However, owing to certain procedural technicalities and the subsequent stay order granted on the matter, the anti-dumping duties could not be collected, which has left the national PSF sector vulnerable to unfair competition from imports.
The study shows that there remained a high concentration in the sector with dominance of one player. However, the ability of PSF producers to abuse their dominance and raise PSF prices artificially is limited on account of the option available for PSF users to substitute with other fibers and to switch to cheaper and competitive imports. From a competition regulator's perspective, capacity utilisation of manufacturing units is a very important factor. Low capacity utilisation or presence of large idle capacity serves as an entry barrier for potential market entrants. Low capacity utilisation can also be indicative of a nexus between producers to keep production low and prices artificially high. CCP study suggests that the PSF industry utilises capacity fairly well, and is hence doing fine on this indicator from a competition perspective.
The CCP has noted that the domestic PSF production declined by 15 percent during last 5 years. This was a result of interplay of various factors such as local demand, which in turn rests on the price and production levels of its substitute cotton, price of imported PSF and costs related to business and manufacturing. It was observed that the cost of doing business has increased manifold, cheap imported PSF is available from various countries and closure of a major PSF unit have all contributed to a decline in domestic production from 426,342 MT in 2004-05 to 364,354 MT in 2008-09.
In addition to the cost of energy, market dynamics of the downstream industry such as business negotiated discounts, credit facilities based on volume, and geographical location of the customer are determinants of price for individual buyers. Fluctuations in the international crude oil price and hence changes in the PTA and MEG prices play a pivotal role in the determination of PSF price since it is a petrochemical-based industry and about 75-80 percent of the cost depends on these raw materials. We observe that the relative prices of crude oil and price of polyester are fairly synchronised.
The study shows that in the post July 2008 period, when crude oil prices crashed, there appears to be a wider gap between the price of polyester and crude oil compared to the earlier period.
This increasing differential between PSF and crude oil prices may be due to increased gross margins of PSF producers or a surge in production cost. A deeper analysis into the operations of PSF producers and the state of industry in Pakistan in general reveals increasing cost of production on account of the energy crisis and inflationary trend in the economy.
While comparing the national and import prices, the historical trend shows that both the prices follow a similar trend, though the national prices have generally remained higher. There remained little variation in the prices charged by various producers. This is partially explained by exogenous factors such as the cost of raw material, and the relatively homogenous nature of commodity. The PSF industry was found to show signs of price parallelism. Competition agencies of Pakistan - MCA and later on the CCP - noticed this similarity in prices amongst PSF producers. Proceedings were initiated for a prima facie case of cartelisation/collusion, but it could not be proved. CCP in its order gave 'benefit of doubt'. During the course of the legal proceeding, the Commission asked the defendants to give an undertaking on behalf of their respective Boards of the non existence of any formal or informal association that co-ordinates to adopt or fix parallel pricing or output. All producers were willing to do this, and submitted affidavits in this regard.
The report said that the Members of the All Pakistan Textile Mills Association (Aptma) are the main users of PSF and this association has expressed its reservations repeatedly regarding the import duty on PSF, anti-dumping duties and the likelihood of cartelisation amongst PSF producers. This study does not support Aptma's view regarding collusion of PSF producers.
While analysing the regulatory framework, it was observed that the SECP formulated a requirement for the polyester industry to conduct cost audits and make the reports public to all shareholders through the companies' websites. We are of the view that publicising cost information through websites is essentially disclosure of sensitive information and competition agencies are suspicious about such information sharing between competitors. It reduces the uncertainty in pricing and eases the competitive pressure on firms to reduce prices. Although the SECP deferred the requirement till 2011, given the market structure, it remains advisable from a competition standpoint not to impose such disclosure requirements.
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