The raw materials prices to produce polyester staple fibre at the outset of 2004 have jumped by over 50 percent, touching their highest levels at the international markets because of rising oil prices.
PTA, Paraxylene and MEG prices are touching their highest levels on the back of surging oil prices. On monthly basis, MEG prices are at their 15-year high, while PTA is also following suit.
This is going to hurt PSF margins. However, declining trend observed in cotton prices would make it difficult for PSF companies to do so without hurting consumption.
The redeeming factor is the expansion going on in textiles, which shall maintain PSF demand at current levels though blending ratio might take a hit. On the other hand PTA margins are showing growth and benefiting Pak PTA, which is the only PTA manufacturer in Pakistan.
Mohsin Ahsan, research analyst at Global Securities in a report, said on a two months raw material inventory basis, current PSF margins are standing at Rs 20.8 per kg (highest in last six months).
In order to maintain primary margins at the current level, PSF prices have to go up by Rs 10 per kg in next two months. At present, international cotton futures are trading at around 57 cents per pound - 67 cents per pound, assuming 15 per wastage - though they have been showing declining trend since January '04.
This trend is expected to continue in the coming months due to better crops in China and Pakistan and lower consumption in US.
The PSF prices are currently trading at 62 cents per pound - 63.5 cents per pound, assuming 2.5 percent wastage - so there is still room for PSF prices to go up Rs 7 per kg (to become equal to cotton). But this is based on assumption that cotton prices would stabilise at the current level, which is unlikely due to above mentioned factors.
The current year cotton consumption is likely to be 12 million bales (2 million tons) while PSF's available capacity is 630,000 tonnes per annum, so if blending ratio declines by 2 percent to 30 percent, PSF manufacturers would still be able to operate at 97 percent capacity utilisation level in FY05.
Two players - ICI and Ibrahim Fibres - are brining in another 225,000 tonnes per annum capacity in FY06, which may result in oversupply situation if demand does not keep pace with the increasing supply with last expansions taking two years to get absorbed.
International PTA margins for August '04 averaged $314 per ton, highest monthly average since August '02 when margins surpassed $400 per ton level. In case of Pak PTA, which has 99 percent domestic sales (on which it enjoys 15 percent protection), the margin was over $430 per ton.
The July-August '04 average PTA margin was $390 per ton compared to $340 per ton of 2QCY04, so company's profits are expected to maintain their rising trend in 3QCY04 and annual profit may even surpass our expectation of Rs 1.5 billion.
The only concern is that ICI is planning to liquidate its holdings in the company which may affect stock price, the report said.