Textile industry may turn to PSF: Higher cotton prices

There are words making round in the market that expectations of shortfall in cotton crop may be sad for the growers but it would be good news for the Polyester Staple Fibre (PSF) industry.

Some analysts believe that owing to the sudden surge in domestic cotton prices, PSF sector could end up as a big beneficiary. "The higher cotton prices are expected to result in substitution by textile manufacturers from high priced cotton to relatively cheap synthetic fibre," says Tanvir Abid, head of research at Jahangir Siddiqui Capital Markets (Pvt) Limited.

The market is generally expecting producers to seize the opportunity to raise PSF prices, by the end of October. Local prices rule at Rs67 per kg (ex-GST) while international prices stand at $950 to $1,000 per ton. Prices in the local market had touched Rs80 per kg (excluding GST) at the start of April, but later plunged to Rs63 per kg.

There now remains price differential of Rs15 per kg (excluding GST) between that of cotton and PSF. And the market believes that textile mills could be tempted to improve slightly, the blending ratio in favour of the PSF. But would the mills opt to substitute PSF with cotton for raw material in any major way?

Some analyst such as Khalid Iqbal Siddiqui at InvestCap answer in the negative. He says that larger textile mills in the country that operate on the basis of international export orders, might have some leeway as far as a slight deviation in cotton-polyester blending ratio was concerned, but they could not just completely switch over to PSF from cotton.

Mr. Siddiqui argues that it would not be convenient for textile mills to keep changing between cotton and PSF as raw material, when price of one is lower than the other. "This switching leads to problems with the machinery and we believe that no textile mill owner would want to jeopardize his mill''s future just to tide over the short term disadvantage of higher cotton prices," says Mr. Siddiqui.

International PSF primary margin continues to rule at around $170 to $175 per ton. But in the local market, analysts believe that unlike earlier upward movements in prices during 2003, which were mainly driven by soaring input prices (those of PTA & MEG), the increase in PSF prices now would be due to improvement in primary margins of the sector.

The PSF industry had undergone capacity expansion of around 183 thousand tons per annum during 2002, which sparked a price war among producers. Tanvir Abid says that with local demand-supply gap estimated at around 150,000 tons, the expected pick up in PSF demand would help in utilization of excess capacities.