Excess capacity seen eating into polyester cos'' margins

The good times for polyester manufacturers appear to be coming to an end. The industry, which has seen high margins in the recent past due to robust demand and a fall in cotton production, is likely to face pressure due to capacity enhancements, reports The Economic Times.

According to an Icra report on man-made fibres, the capacity additions will surpass demand, resulting in declining margins. The pressure will be on the non-integrated polyester fibre and yarn manufactures as rising cost of fibre intermediates will affect their input chain. However, low-cost integrated polyester makers are likely to benefit by the developments.

Globally, the man-made fibre industry had staged a comeback last year, as the excess capacity created in the mid-90s got exhausted due to high demand. This boosted the operating margins and the decline in world cotton production by 11% in ‘02 was helpful. Though most of the man-made fibres recorded increased consumption in ‘02, polyester reported the highest volume growth. While demand for polyester filament yarn (PFY) grew by 8%, for polyester staple fiber (PSF) it was a rise of 5.9%. Even though signs of global economic recovery are expected to keep up the demand, the growth rate is likely to slow down marginally this year.

The demand-supply dynamics in two key fibre intermediates, purified terephthalic acid and mono-ethylene glycol are tilted towards high demand. In MEG, while no new capacity is coming up this year, German chemicals giant Bayer has already announced that it will exit the business. This will lead to a global decline in operating capacity and is expected to push operating rates to peak levels.

Similarly, in the case of PTA, capacity is likely to prove inadequate with the rising demand. This should translate into high margins till the end of ‘04, after which new capacity additions are forecasted.