Indian polyester industry poised for upturn

NetScribes/Kunal Puri

The Indian polyester industry is poised for an upturn. With growth in domestic demand for yarn and fibre expected to grow at 7 per cent in 2000-01, polyester companies are charting consolidation and expansion plans.

The upturn in the industry is being driven chiefly by rising cotton prices. Polyester and cotton are competing raw materials of choice for the textile industry. With prices on raw cotton falling by nearly 50 per cent over the last five years, cultivation of cotton is proving unproductive against other cash crops. The result: area under cotton cultivation is shrinking. This has led to a shortage of around 8 per cent in cotton inventories, causing a rise in cotton prices and increasing the use of polyester by the textile industry.

According to a senior official at Indo Rama Synthetics, the second largest polyester manufacturer in India, better prospects for the industry have prompted the company to chart out detailed plans for expansion. Indo Rama is considering setting up a plant in Karnataka with a capacity of 300,000 tonnes. However, the plant would only be operational around 2003.

Despite the upbeat mood, there could be hindrances. The imposition of provisional anti-dumping duty on Indian polyester Stable Fibre (PSF) by the European Commission and the volatility in international crude oil prices - the base from which the polyester raw materials, monoethylene glycol (MEG) and purefied terephthalic acid (PTA) are derived - are some factors which could dampen the rosy outlook for the polyester industry.

Foreign broking house Jardine Fleming however, seems optimistic about the sector. According to Jardine, the abolition of the quota system in the international markets and the opening up of the European and the US markets to Asian manufacturers will prove beneficial to Indian manufacturers.

The World Trade Organisation recommendations of free trade were first implemented in January 1995. However, the main benefits will accrue around 2005 because the recommendations say that 51 per cent of the quotas must be removed in phases by 2005 and the remaining quotas must go in a single stroke after 2005.

This will greatly enhance the market shares of the Asian manufacturers as they have a competitive advantage over their European counterparts in terms of cheaper labour and more efficient operations, thus contributing to a lower cost of production.

At present, Asia contributes to more than 55 per cent of global polyester fibre (PSF) production and more than 64 per cent of polyester yarn (PFY).

The report estimates that Indian polyester melt utilisations, which is a parameter of efficiency, will rise from 70.5 per cent in 2000 to 78.4 per cent by 2002.

The PSF sector is a cyclical one, with alternating boom and bust periods over a 10-year range. The years 1990-95 were considered to be the boom period and the subsequent five years saw the downslide. Factors like the NAFTA agreement in 1997 eliminated duties on trade between the North American countries of USA, Canada and Mexico.

This ensured that exports from India to the US were uncompetitive against those from Mexico. The East Asian currency crisis further hit domestic manufacturers as imports from East Asia were much cheaper than the domestic output.

The optimism is clearly reflected in the Reliance price. The scrip has risen from Rs 337.05 on August 31, 2000 to Rs 367 on September 8, 2000 at noon.

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