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The Indian Manmade Fibres Industry
September 2005
Industry Comment
www.icra.in Page 1 of 45
Industry Comment The Indian Manmade Fibres Industry
Contacts:
Yogesh Malhotra Manager
Amul Gogna Executive Director &
Chief of Information and Grading Service
Date September 2005
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Page 2 of 45
Industry Comment The Indian Manmade Fibres Industry
T ABLE O F C ONTENTS
Porter's Model.......................................................................................................................................................................4
Polyester Players............................................................................................................................................................ 31
Acrylic Players ................................................................................................................................................................. 34
Nylon Players ...................................................................................................................................................................35
Viscose Players............................................................................................................................................................... 37
Outlook .................................................................................................................................................................................. 41
Page 3 of 45
Industry Comment The Indian Manmade Fibres Industry
PO R T E R ' S M O D E L
Threat of Substitutes:
Medi um Polyester has better
properties in comparison to cost
than other synthetic fibres.
Against cotton, while it is more
stronger and durable, it lacks
comfort. Worldwide, it is
substituting cotton and other
fibres on account of its low and
reducing cost.
Page 4 of 45
Industry Comment The Indian Manmade Fibres Industry
ST R U C T U R E OF THE INDUSTRY
In the cotton dominated Indian textile industry, manmade fibres account for an around 48% share as
against 58% globally. However, in 2004-05, with large volumes of cotton being exported in various
forms of textiles and apparel (accounting for more than 40% of the domestic cotton production), the
share of manmade fibres in the domestic finished textiles market stood at around 60%.
The textiles industry in India, employing around 35 million people, accounts for around 20% of the
countrys total industrial production and 15% of its total exports. The economic liberalisation process,
initiated in 1991, has seen Indian textile manufacturers shifting from traditional exports of raw cotton,
to export of yarn, fabric and garments, with increasing emphasis on value-addition. The industry is the
largest net exports earner with annual export revenues of over Rs. 600 billion (15% of countrys
exports) and contributing almost Rs. 50 billion to excise collections (over 10% of the countrys total
excise revenue).
Currently, the Indian textile industry accounts for 8.0% of the global textile fibre (including cotton)
production. India is the fourth largest manmade fibre producer globally, after China, Taiwan and the
US. At present, the global production figure for manmade fibres is around 38.0 million tonnes, while
the Indian figure is around 2.2 million tonnes. Thus, Indias share of the world manmade fibres
production is lower at around 5.7%.
A textile fibre needs to be converted into yarn and fabrics. Also, it must be capable of being dyed in various
shades and patterns (aesthetics). The most commonly used fibres are compared on various important
parameters in the following table.
Polyester filament yarn (PFY) is by far the most popular synthetic fibre/yarn in India (for the
production/consumption trends in different fibres, refer following section). Till the late 1990s, the
production of PFY displayed a faster growth rate of 19% per year. The growth rate for polyester staple
fibre (PSF)used for blending with cotton and viscose yamwas 18% over the same period.
However, in the recent past, the consumption of PFY and PSF has slowed down significantly. While
Page 5 of 45
Industry Comment The Indian Manmade Fibres Industry
the growth rate of PFY was 7.1% between 2000-01 and 2004-05, PSF consumption reported only
2.8% growth during the same period.
The share of manmade fibres in Indias total textile fibre consumption and the past trends in the
consumption of manmade fibres are depicted in the following figure.
90.0
80.0
70.0
60.0
50.0
%
40.0
30.0
20.0
10.0
0.0
1994-95 1995-96 1996-97 1997-98 1998-99 1999- 2000-01 2001-02 2002-03 2003-04
2000
Compiled by INGRES
The Indian manmade fibre industry consists of two main sets of players: one, who are erstwhile textile
players, and two, who have a presence only in manmade fibres (that is, non-diversified players).
Further, there are some companies that have been established by equity contribution from the
technology licensors. The Indian petrochemical companies have a presence mainly in the fibre
intermediates segment of the fibre value chain (excluding Reliance Industries Limited, or RIL, which
can be considered as a former textile player).
The industry structure for most manmade fibres is pyramidal, with a small number of players having a
large capacity-share and vice-versa (refer following figure). As expected, only the large players have
been able to withstand the low international margins and the over-capacity scenario characterising the
manmade fibres industry during the late 1990s.
20 5
4
15
3
10
2
5
1
0 0
>2,00,000 70,000- 30,000-70,000 <30,000 >2,00,000 2,00,000 - 25,000 - <25,000
2,00,000 50,000 50,000
Page 6 of 45
Industry Comment The Indian Manmade Fibres Industry
In all synthetic fibres, the plant capacities of Indian players (except Reliance Industries Limited or RIL,
and Indo Rama Synthetics Limited or IRSL; Grasim Industries Limited in viscose fibres; and SRF
Limited in Nylon) are significantly lower than those of their international counterparts (refer following
figures). Since the global plants are larger, their higher economies of scale and dominant shares of
the world market have allowed them o t achieve higher profitability even when industry margins are
low.
180
160
140
120
'000 tonnes
100
80
60
40
20
0
West United Japan South Taiwan China India India*
Europe States Korea
250
200
' 000 tonnes
150
100
50
0
West United Japan South Taiwan China India
Europe States Korea
Page 7 of 45
Industry Comment The Indian Manmade Fibres Industry
120
100
80
60
40
20
0
Western USA Japan South Taiwan China India
Europe Korea
80
70
60
50
40
30
20
10
0
Western USA Japan South Taiwan China India India
Europe Korea NFY NITY
Most of the manmade fibre manufacturers in the Indian industry are not integrated with the production
of fibre intermediates. However, the few players who have facilities to produce fibre intermediates also
have large capacities (except in the case of acrylonitrile and rayon grade wood pulp). Further, the raw
material industry unlike the downstream fibres industryis highly concentrated.
In the polyester industry, only RIL and Bongaigaon Refinery and Petrochemicals Limited (BRPL) are
integrated backwards into the production of purified terephthalic acid (PTA)/di methyl terephthalate
(DMT) and mono ethylene glycol (MEG) ( RIL manufactures PTA, and BRPL produces DMT) while
the other players depend on other companies or import their requirement of intermediates. Indian
Petrochemicals Corporation Limited (IPCL) and Bombay Dyeing & Manufacturing Limited (BDML)
have a presence in the polyester intermediate, DMT.
In other fibres, the level of integration with raw materials is similar. In nylon, only Gujarat State
Fertilisers Corporation (GSFC), which has a small share in nylon production, has captive caprolactam
facilities. Similarly, in acrylic fibres, only IPCL produces acrylonitrile in-house while the rest depend on
Page 8 of 45
Industry Comment The Indian Manmade Fibres Industry
imports for the intermediate. However, in viscose staple fibre, both the players, namely Grasim
Industries Limited (Grasim) and SIV Industries Limited (SIV) are partly integrated into the production
of rayon grade wood pulp.
RIL, in sharp contrast, has a larger share in polyester intermediates than in polyester. RIL is the most
integrated polyester manufacturer in the worldfrom reformate (raw material for paraxylene)
production to polyesterwhich places it among the least-cost producer of polyester fibres
globally. During the year, Reliance invested in Trevira, a leading producer of branded polyester fibres
in Europe.
Trevira has a manufacturing capacity of 130,000 tonnes per annum of polyester staple fibres. With the
acquisition, RIL has become the worlds largest producer of polyester fibre and yarn.
The market shares of various players in various stages of the polyester chain are presented in the
following flowchart.
Page 9 of 45
Industry Comment The Indian Manmade Fibres Industry
Paraxylene PTA/DMT
Reformate PET Chips
PX Manufacturers (share in %) PTA /DMT Manufacturers (share in %) PSF Manufacturers Share (%)
BRPL (1.7%) BRPL (2.1%) Reliance Industries Limited 39.4%
Reliance Industries Limited (95.5%) Reliance Industries Limited (60.2%) Indo Rama Synthetics (I) Limited 19.0%
Indian Petrochemicals Corporation Limited* Indian Petrochemicals Corporation Limited* Appollo Fibres Limited* 7.9%
(2.8%) (1.4%)
Bombay Dyeing and Manufacturing Co. Orissa Synthetics Limited * 5.0%
Limited (7.8%) Futura Polyesters Limited 5.5%
MCC PTA India Private Limited (20.0%) BRPL 4.3%
SVC Superchem Limited (5.6%) Terene Fibres India Limited * 4.3%
Garware Polyester Limited (2.8%) India Polyfibres Limited 5.7%
Swadeshi Polytex Limited 2.0%
Viral Filaments 1.9%
J K Synthetics Limited 1.9%
Ahmedabad Mfg. and Calico Ptg. 1.1%
Co. Ltd
Garware Petrochem Limited 1.0%
Arora Fibres Limited 0.9%
In India, only the small players with insignificant capacities have a presence in diverse types of
fibres. These players are also financially unprofitable.
During the second half of the 1990s, a downturn in the global polyester markets, over-capacity
in the domestic market, and the entry of very large integrated players not only turned the small
players sick, but also hurt the medium capacity players who reported poor financial
performance. The stock prices of these middle-capacity players took a severe beating, making
them good targets for acquisition by the financially strong players. Thus, market leader
Reliance Industries Limited (RIL) acquired various medium-capacity players in the Indian
polyester filament yarn (PFY) industry, like Raymond Synthetics, ICI and DCL Polyester, during
this period.
During 2002, the twin factors of low fibre intermediate prices and high cotton prices in the
international markets increased the margins of the fibre producers significantly. While the
medium capacity players improved their financial performance significantly and were profitable
once again, and continued high profitability allowed net worth of some of the players (which had
become negative earlier) to turn positive. However, in FY2005, declining cotton prices, high
fibre intermediate prices and worsening international demand supply situation has resulted in
significant decline in margins. The increasing over-capacity in global markets and nearby China
further exacerbated the situation.
In substitutes, cotton is the most important in the Indian textile industry, accounting for around
52% of the domestic fibre/yarn consumption. Cotton yarn constitutes more than 70% of the total
spun yarn produced in the country. Increasing exports of cotton and cotton-based textiles have
allowed the polyester industry make inroads into the domestic textiles market.
The Indian weaving and garment manufacturing industry is dominated by the decentralised
small-scale industry (SSI), because of the historical tilt of Government policies towards it. In
effect, this SSI-tilt, till recently, prompted several vertically integrated composite mills to opt out
of the industry. The non-applicability of strict labour laws to SSIs, the lower excise duties levied
on them, and the reservation of garment manufacture for small units are some of the policy
measures that hitherto deterred the development of the corporate sector in this industry.
Notably, however, the direction of Government policy has changed since November 2000 and
the Government has announced several fiscal measures aimed at increasing productivity in the
sector (refer Annexure 1 for policy reforms in the Indian Textile industry).
The fabric manufacturing industry consists of composite mills, powerlooms, handloom and
hosiery/knitting units. Powerlooms have a significantly large presence in the manmade fabrics
1
sector, as the hank yarn obligation does not obstruct the flow of manmade yarn to power-looms.
1
which requires spinning units to either process about a quarter of their deliveries in the form of a yarn used by
handlooms or to transfer the obligation to other firms
Mill
Handloom
Mill 2%
6%
6% Hosiery
Powerloom
3%
Hosiery 33%
28%
Powerloom
89%
Handloom
33%
Mill Mill
Hosiery 5% Hosiery 4%
13% 17%
Handloom
2%
Powerloom
Handloom 60%
19%
Powerloom
80%
Compiled by INGRES
As of March 2004, the country had 1.84 million power-looms with a valid permit, of which 45%
were in Maharashtra, 17% in Gujarat and 18% in Tamil Nadu. The size of a typical power-loom
unit in India is small (<75 looms) and it consumes mainly grey yarn (dyed yarn is also used, but
in limited quantities).
The small-scale nature of the various units in the Indian weaving sector has prevented them from
making large investments in modernising their looms. As depicted in the following graph, the
share of shuttle-less looms in the Indian textiles industry, which accounts for over 9% of the
looms installed worldwide, is only 3% as against a share of 30% worldwide, thereby indicating a
low degree of modernisation in the Indian weaving industry. The small-scale sector, which is the
predominant sector in the Indian weaving industry, can invest limited funds in modernisation, and
thus, the Indian weaving sector has remained as one using antiquated machinery.
Degree of Modernisation
90
% of shuttleless looms of the total
76.8
80
67
70
60.8
60
50
40
30.2 29.3
30 23.2
17.4 17.7
20 11.9
10 6.2
3.7
0
India (9.3) World Africa Mexico North South China Indonesia Pakistan Asia (65.1) Europe
(4.9) (2.2) America America (33.0) (10.2) (1.0) (15.5)
(6.0) (9.8)
Global Cyclicality
Globally, the manmade fibres industry exhibits considerable cyclicality. Typically, significant
capacity additions are initiated in the high-profitability phase, which, when implemented after
the gestation, cause oversupply. This pulls down profitability and a period of slump ensues.
Overall, the demand for manmade fibres has risen significantly during the last decade with
cotton being increasingly substituted and the developed economies and Asia reporting
economic growth (barring 1997-1998, when the East Asian currency crisis occurred). Among
manmade fibres, the fastest growth has taken place in polyester, while the demand for
cellulosics which had declined earlier, is now showing an increasing trend.
The demand for manmade fibre slowed down between 1997 and 1999, mainly on account of
the East Asian crisis. The large amount of capacity additions (during the mid- and late-1990s)
exacerbated the decline in operating rates. The financial and currency crises not only in East
Asia, but also in Russia and Latin America, had a heavier impact on the manmade fibre
markets in 1998 than initially expected.
Most of the capacity additions in Asia during the mid-1990s were prompted by the fast rising
demand in China. However, China itself built up large capacities during the late 1990s, thus
exacerbating the oversupply situation.
Slow capacity additions post-1999 and the recovery in demand for manmade fibres in 2002
resulted in an increase in operating rates and margins. The world cotton output declined by
11% during 2002 as production dropped in most of the leading producing countries. The
decline in cotton output led to an increase in cotton prices and in the demand for manmade
fibres. Overall, despite the slowdown in leading developed economies and the unfavourable
geo-political environment, textile demand showed an increase of 4.1% in 2002 over the 2001
level. Almost all the manmade fibres reported an increase in consumption in 2002, with
polyester showing the maximum volume growth. While PFY demand reported an increase of
8.0%, PSF demand increased by 5.9%, thus lifting the global operating rates significantly.
World NFY Consumption Trends and Operating World ASF Consumption Trends and Operating
Rates Rates
76.0 3.5
5.0
74.0 85.0
3.0
72.0
4.0
2.5
70.0 80.0
66.0 75.0
1.5
2.0
64.0
1.0
62.0 70.0
1.0
0.5
60.0
World PSF Consumption Trends and Operating World PFY Consumption Trends and Operating
Rates Rates
84.0
14.0 79.0
82.0
20.0
12.0 77.0 80.0
78.0
10.0 75.0
15.0
76.0
8.0 73.0
74.0
10.0
6.0 71.0 72.0
70.0
4.0 69.0
5.0 68.0
2.0 67.0
66.0
3.0 130.0
120.0
2.5
110.0
2.0
100.0
1.5
90.0
1.0
80.0
0.5
70.0
0.0 60.0
1994 1996 1998 2000 2002 2004
However, following the mini peak in 2002, significant capacities have been added mainly in
China, which has resulted in decline in operating rates in the Chinese and global market. Even
though the demand growth has been strong during 2001-2004, with the PSF and PFY demand
increasing at a rate of 7.0% and 8.3% respectively, the capacity additions have been
significantly higher resulting in decline in operating rates. During 2004 alone, 3.5 million tonnes
of polyester capacity were added. The current operating rates in China are low at around 60%.
The global operating rates are also low currently and during 2004, the global polyester industry
witnessed low profitability.
The following table highlights the continuation of trend of shifting of polyester production to
Asia. During 2003, the Asian region accounted for 84% of global capacity with China
accounting for nearly half of the Asian capacity.
Compiled by INGRES
With the global economy expected to continue to show strong growth, demand for textile fibres
is also expected to continue on its high growth path. Global polyester demand is expected to
grow at over 4% per annum during 2005-08, which is lower than the growth rates of 4.8% and
9.7% per annum achieved during 1998-2002 and 1994-98, respectively.
Global PSF demand is expected to grow at over 3% per annum till 2008, which is lower than
the 5.1% achieved during 1998-2002. Chinese PSF demand is expected to increase at a rate of
over 6% per annum till 2008, which again is lower than the 12.5% achieved during 1998-2002
and would depend upon the performance of Chinese textile industry in post quota period
especially when some of its textile articles are expected to continue to face restraints.
Global PFY demand is expected to grow at the rate of over 4% till 2008. Chinese demand for
PFY is expected to increase at 7% per annum over the same period, which is significantly lower
than the 18% achieved during 1998-2002.
However, the capacity additions in polyester fibres (mainly in China) are expected to be faster
than the increase in demand till 2006, with the result that the operating rates are likely to
decline till 2006. Further, polyester intermediates are expected to show strong operating rates
and margins till 2006, with the low global profitability of polyester manufacturers continuing over
short to medium term.
Till 1993, the Indian manmade fibres industry was insulated against global cycles by high
tariffs. But post-1993, the Indian industry has been exposed to global trends through the
lowering of tariff barriers. Consequently, Indian manmade fi bre manufacturers now find their
profitability subject to the same cyclicality as their global counterparts. While the current
downturn on account of significant capacity additions in China has severely affected the global
profitability levels, the Indian market has experienced it to a lower extent as the Indian
producers are relatively insulated from the Chinese markets as they dont export significant
quantity of polyester to China.
Raw Material
Most of the manufacturers in the industry are non-integrated with production of fibre
intermediates. However, the few players which have facilities for production of fibre
intermediates have large capacities so that the intermediates industry (except acrylonitrile and
rayon grade wood pulp) are also in surplus capacity.
Polyester Intermediates
Presently, the country is self sufficient in production of polyester intermediates. While two plants
(also the largest plants in the country) manufacture PTA, the other four plants manufacture
DMT. BRPL, RIL and IPCLs operations are integrated with the manufacture of paraxylene.
BRPL and RIL have there own refineries located adjacent to their petrochemical plants.
RIL with a large share of the Indian polyester market also has a significant position in the global
market for PTA and paraxylene (raw material for PTA). In line with the other segments of the
polyester chain, RILs facilities are world scale, while the other plants are smaller.
MEG, the other intermediate used by the polyester industry, has matched demand supply
position in India. The two large players in the industry are large ethylene producers. MEG,
being an ethylene derivative, is produced in the country by only the captive ethylene producers.
Two out of six plants for ethylene production use molasses, which was the predominant source
of ethylene before sugar price decontrol took place, which rendered ethylene production
through molasses as economically un-viable. RIL with the recent acquisition of SM Dyechem
Limited in December 2004, now owns all the plants except the capacity owned by India Glycols
Limited.
Reliance Industries Limited owns more than 95% of the Indian paraxylene capacity. RIL
produces paraxylene through its two plants located at Hazira and Jamnagar. While the
petrochemical plant at Hazira is an ethylene cracker based on naphtha and produces around
250,000 tpa of paraxylene, the Jamnagar plant is a reformate based aromatics plant producing
1.385 MMT of paraxylene and uses 2.8 MMT of reformate from its adjoining refinery.
Till the commissioning of Jamnagar aromatics plant, India was importing paraxylene
significantly from mainly South East Asia and USA. However, with the commissioning of RILs
unit in 1999, the country has become a net exporter. RIL is estimated to have exported more
than 200,000 tonnes of paraxylene in FY2004.
Other Fibres
Nylon: The fertiliser companies -- GSFC and FACT, produce Caprolactam, the fibre
intermediate for Nylon-6. The fibre intermediates for Nylon-66, the other popular nylon, are not
produced in the country.
Acrylic fibres: In India, Acrylonitrile is produced only by IPCL with the capacity being mainly
for captive use. All the other players in the industry depend upon imports. Despite significant
imports, no project has been implemented for manufacture of acrylonitrile for more than a
decade. Further, IPCLs capacity, which is located at Baroda (state of Gujarat) is only 30,000
tonnes per annum which is significantly smaller than the plants in the other countries. The
propylene required for the production of acrylonitrile is sourced from the naphtha cracker in the
adjoining complex.
Viscose Fibres: The viscose producers own the Indian rayon grade wood pulp (raw material
for viscose fibres) capacities. The main forest-wood used for generating wood pulp in India is
from the bamboo trees.
The demand for fibre intermediates depends not only on the demand for fibres but also
consumption in other applications. Polyester, apart from being used as a fibre, is also used as
raw material for bottles and films. Thus, the demand for purified terephthalic acid (PTA)/di-
methyl terephthalate (DMT) and mono-ethylene glycol (MEG) also depends on the demand
from these markets. The following table presents the likely future demand scenario for fibre
intermediates, taking into account the demand from other applications as well. A significant
increase in capacity for polyethylene terephthalate (PET) packaging resin is expected to lead to
a faster growth for polyester intermediates than polyester fibres.
35,000 88.0%
30,000 86.0%
25,000 84.0%
20,000 82.0%
15,000 80.0%
10,000 78.0%
5,000 76.0%
0 74.0%
1996
1997
1998
1999
2000
2001
2002
2006E
2008E
2003A
2004E
2005E
2007E
Compiled by INGRES
The global demand for PTA is expected to increase (from 2005 to 2009) at the rate of more
than 5%, with a substantial increase in demand arising from China and other developing
countries (for use as fibre) and the developed countries (for use as PET packaging resin).
Currently the margins are high as the capacity additions were small and the rise in demand was
higher. The conversion margins for PTA (over PX) are expected to continue to remain high till
mid-2006. The high crude oil prices are expected to further add to prices of PTA and thus, the
prices are expected to remain high over the medium term.
The growth in MEG demand for PET consumption is likely to be more than 5% per annum over
the period 2005-2008. The other ethylene oxide derivatives (EODs) are expected to report a
lower growth rate of around 3% per annum from 2005 to 2008. In non-glycol EODs, above-
average growth rates are likely in Ethanolamines and Ethoxylates, while below-average rates
may be seen in Polyols and Glycol Ethers till 2007. Significantly high level of shortage has
resulted in high margins in MEG production currently. However, significant capacity additions
are expected to occur in the Middle East and Asia post 2005, thereby reducing operating rates
and margins.
20,000 100.0%
'000 tonnes
80.0%
15,000
60.0%
10,000
40.0%
5,000 20.0%
0 0.0%
1996
1997
1998
1999
2000
2001
2002
2006E
2008E
2003A
2004E
2005E
2007E
Compiled by INGRES
Global PX capacity increased through 1999 and 2000. Most of the erosion in overall polyester
margins during the last downturn in 1999 happened in PX, which was the last in the chain to
enter the build cycle. Now, with small capacity additions and strong demand growth, the
operating rates and margins in PX are expected to increase and touch a peak in 2005-2006.
1997
1998
1999
2000
2001
2002
2006E
2008E
2003A
2004E
2005E
2007E
Capacity Consumption Operating Rate
Compiled by INGRES
The operating profits of manmade fibre producers are dependent on the conversion margins,
which is the difference between the cost of fibres and fibre intermediates. Both the prices of
fibres and fibre intermediates are largely outside the control of manmade fibre manufacturers.
In 1998, the prices and margins for manmade fibres were both at their historic lows. In 1999
and 2000, although the prices recovered following a cost-push (because of the increase in
crude oil prices), the margins stagnated at the previous years levels. Following strong increase
in demand in 2002, the margins improved strongly the same year.
Recent Trends: During Q4 - FY2004, although the increasing international cotton and cotton
yarn prices led to increase in prices of most manmade fibres, the increases in prices of raw
materials on account of increasing petrochemical margins as also increase in crude oil prices
resulted in near stagnation in margins of manmade fibre companies. Subsequently, while the
raw material prices continued to move upwards, the finished yarn/fibre prices did not increase
mainly on account of stagnating cotton prices. Thus, the conversion margins declined till
Q3FY2005, when the cotton prices also declined. Also the global markets, especially China,
were experiencing significant over-capacity during this period. With the Indian market relatively
insulated from the Chinese markets (India does not export significant quantity of polyester to
China), the conversion margins in India were significantly higher than the global average.
However, during Q1 FY2006, their was a recovery in the margins as the prices of
petrochemicals including fibre intermediates declined from their very high levels.
Although Indian yarn exports are highly competitive, the market for yarn is small compared with
the overall textile and apparel market. Besides, the yarn market appears to be stagnating,
especially considering the very high growth rates achieved by value-added products, especially
apparel. This is mainly on account of the trend of developed nations increasingly sourcing
finished apparel from the developing world, which has the advantage of lower labour costs. The
Indian weaving and garment manufacturing industry, on the other hand, is small in size and
decentralised. Moreover, it is characterised by inconsistencies in quality. These factors have
lowered the exports growth despite India enjoying a considerable labour cost advantage.
Indian fabric is competitive in the international market, as cotton and labour (refer following
figure) are relatively cheap in the country. However, the high power and interest costs impair
the advantage to a great extent. Although the investments for modernisation are large, fiscal
incentives announced by the Government in last three budgets alongwith soft interest regime in
the TUFS scheme has provided the fillip to the Indian industry in improving its ability to compete
more effectively in the emerging quota-free global environment.
Apparel Textiles
16.0 13.5
12.4
12.0
8.0
6.8
8.0
4.0 1.2
0.4 0.3 0.2 0.2 0.2
0.0
UK
ina
ly
ia
A
ce
Ba stan
ka
US
Ita
Ind
h
xic
Ch
an
es
an
Me
ki
lad
Fr
iL
Pa
ng
Sr
Source: World Bank
Note: Textiles(1996) and Apparel (1998)
International Textile Trade: MFA giving way to WTO through 10 year phased ATC
The international textile and apparel trade has been driven by quotas provided by importing
nations to the exporting nations and has been outside the purview of GATT (General
Agreement on Trade and Tariffs) and later on, WTO. Initially, the MFA (Multi Fibre
Arrangement) governed the textile trade between 1974 to 1994.
The Agreement on Textiles and Clothing (ATC), the successor to the MFA, governed the textile
trade during 1994-2004. The complete transition from MFA to WTO took place in four phases
as the following figure shows.
2004
Complete integration with
WTO framework
At the start of each phase, apart from the removal of items under quota, the quota levels were
also proposed to be increased significantly by 16%, 25% and 25% in each of the three phases.
However, notably, a very small percentage of textile and clothing products had come out of the
purview of quotas in first two phases. The reasons for this have been two-fold:
Firstly, all the items of textile and clothingwhether previously quota related or not were
included in the list of items on which quotas were to be removed. Secondly, the basis of
percentage of items (according to value) to be removed from quotas was on the 1990 data.
Since significant growth in trade has happened over the years, as a result, developed countries
could adhere to the deadlines even by removing a few of the items from the quotas. Thus,
significant level of quota deregulation has happened only in the last phase of ATC, i.e., post
1.1.2005.
During January to April 2005, i.e. after accession of international textile trade to WTO
framework, Indias Exports to US have increased however, at a slower rate than shown by
China. The developed countries share has declined while the developing countries have
increased their share.
The EU's textile and apparel import figures indicate that imports from India had a 11 per cent
growth in January to May 2005. Imports from China were up by over 36% and reached 7.4
billion Euros.
Imports by EU during January to May
The accession of textile trade to the WTO presents both an opportunity and a challenge to the
developing world. While there would be the new opportunities of free market, competition
among the developing countries is also expected to increase, with the result that the share of
the poor performers would be taken away by the good ones.
Although, in the major quota regulated markets worldwide, India used to hit quota ceilings,
which indicates a potential for further possible level of export opportunities, its performance
post dismantling of quotas would critically depend on its ability to compete with Chinese textile
exports. The Chinese textile and apparel industry has demonstrated its ability to meet sharp
increases in export demand. Further, the size of Chinese textile industry is nearly three times
that of India and its apparel exports are larger by even bigger factor. Also, Indian exports
contain more low end and low value added items which would further limit the extent of
increase post quota dismantling. However, with China having joined WTO later in 2001, the
developed countries can impose economic safeguards (till 2007) in order to limit Chinese growth. In
May 2005, the US imposed restraints on China on the following products:
Recently, EU has also imposed restraints on ten categories of textiles imported from China.
This is likely to help other developing countries including India.
India, however, also needs to shift its focus to exports of textile and clothing based on
manmade fibres. As the following figure highlights, the share of manmade fibre based textile
and clothing was only 16% for Indian exports to the US as against average of 37% of total
exports of textile and clothing to the US.
Fibre Wise Share of US Imports of Textile and Fibre Wise Share of US Imports of Textile and
Apparel from World 2004 Apparel from India 2004
Others
4% Others
Wool 2%
Wool 12%
6%
MMF
16%
Cotton
MMF 53%
37%
Cotton
70%
Compiled by INGRES
T R E N D S I N P R O D U C T I O N, C O N S U M P T I O N, P R I C E, C A P A C I T Y
UTILISATION
1400
1200
1000
'000 tonnes
800
600
400
200
0
1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-
86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05
Compiled by INGRES
800
700
600
500
'000 tonnes
400
300
200
100
0
1980-81
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
Compiled by INGRES
50.0
45.0
40.0
35.0
30.0
'000 tonnes
25.0
20.0
15.0
10.0
5.0
0.0
1980- 1986- 1988- 1990- 1992- 1994- 1996- 1998- 2000- 2002- 2004-
81 87 89 91 93 95 97 99 01 03 05
Compiled by INGRES
80.0
70.0
60.0
50.0
'000 tonnes
40.0
30.0
20.0
10.0
0.0
1980- 1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001-
81 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02
Compiled by INGRES
160
140
120
100
'000 tonnes
80
60
40
20
0
1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-
90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05
Compiled by INGRES
400
350
300
250
'000 tonnes
200
150
100
50
0
1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-
86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05
Compiled by INGRES
Demand
As the following figure highlights, the demand for manmade fibres depends on various factors
that may be classified as:
textile demand generating factors: most notably, income growth in the overall economy;
decline in poverty levels; level of industrial investments; level of automobiles sales; and
exports, and
fibre substitution factors: prices, excise duties and availability in relation to other fibres;
climatic conditions; intangible factors such as image, fashion, look, and attractiveness.
Besides, the local demand for fibres and yarn also depends on two other factors: imports of
manmade fibres and yarn, and of manmade fabrics and clothing.
--Exchange
Rates;
--Domestic Cotton
Prices Vs.
International
Cotton Prices;
--Export
Exports of Cotton,
Textiles & Apparel
Production of
Cotton Textiles Availability Polyester
Domestic MarketFibre
= Production less Exports Differentiation based on:
Tangibles: Comfort, Fit,
Durability and Price
(including excise duties).
Intangibles: Emotional, --Capacities of
In India, the demand for polyester fibre has risen by over 15% during the last two decades.
Increasing availability, coupled with lower excise duties, has led to this brisk pace of growth.
However, there are two reasons to doubt the continuation of the high growth momentum in
polyester demand in the country. These are uncertainty over what the impact of WTO would be
on the Indian textiles industry, and the already high share of polyester in the domes tic fibre mix.
With international textile trade coming under the WTO from January 1, 2005, the Indian textile
industry has been exposed to market forces. Not only is there now increased competition in the
export markets, but even the domestic market could face the threat of imports. The threat from
imports is real, mainly because of the inefficiency of the domestic weaving sector, which, in
turn, is largely attributable to the stringent regulations on labour in force. Indias strict labour
laws and preference for small-scale sector have historically deterred the establishment of larger
firms in the weaving sector. Consequently, the Indian weaving industry is the least modernised
globally, and uses obsolete machinery. In recent years, the Government has announced
various fiscal measures that seek to encourage modernisation, and hence efficiency, given the
critical bearing that would have on Indias performance.
So far, the increase in the exports of cotton based textiles has provided polyester the
opportunity to raise its share in the Indian market; this, in turn, has increased the demand for
manmade fibres. With China being highly competitive in textiles and clothing and large exporter
of clothing (share of more than 20% already), it has the potential to acquire a substantial share
of the increase in market for developing countries. However, with China having joined WTO
later in 2001, the developed countries can impose economic safeguards (till 2007) in order to
limit Chinese growth. The ability of other developing countries (including India) in competing
with China would be crucial for growth in exports from developing countries. The increased
competition will not only affect India in the export markets but also threaten domestic producers
with imports (especially in the high end premium fabrics and apparel).
Because of the accession of world textile and apparel trade to WTO framework, India's textile
producers all face, primarily, the same challenge: to raise productivity through gains in
efficiency that will still allow them to compete with imports; and continue to expand abroad in
the face of higher cotton prices resulting from conformance with WTO rules and demand
pressures.
The new textile policy is a step to improve productivity and provides the right signals to various
investors to modernise their facilities. Further, the technology upgradation fund scheme
provides soft loans to the textile companies so as to improve their productivity. The extent of
improvement in the level of modernisation would be the key determinant of long-term
performance of the largest sector of Indian industry and its exports. However, as against a
worldwide share of manmade fibre consumption of over 50%, manmade fibre based textiles
account for only 15% of Indian textiles and clothing exports. The share of manmade fibre based
textiles is restricted on account of high excise duties on the same. For strong growth of textiles
and apparel exports post WTO accession, the share of manmade fibre based textiles and
clothing exports would have to be significantly increased in order to address larger portion of
world textiles and clothing market.
Secondly, manmade fibres, especially polyester, are consumed in large proportions in the
household markets now. As the following table shows, the per capita consumption of manmade
textiles has increased at a rate of 6% during 1993-2003. Thus, the share of manmade textiles
in total household purchases has increased from 45.1% in 1993 to 59.0% in 2003. High share
of manmade fibre based textiles pres ent low opportunity for them to further increase their
share.
Metres 1993 1998 2003 Growth Rate Growth Rate Growth 1993-
1993-98 1998-2003 2003
Cotton 7.6 6.39 7.86 -3.4% 4.2% 0.3%
Pure Silk 0.17 0.26 0.13 8.9% -12.9% -2.6%
Woollen 0.17 0.13 0.1 -5.2% -5.1% -5.2%
Man-made / 6.53 9.42 11.62 7.6% 4.3% 5.9%
blends
All 14.47 16.2 19.71 2.3% 4.0% 3.1%
Compiled by INGRES
Overall, with the saturating domestic market and fast growing export market, the growth of
polyester fibre and yarn is likely to be around 8-10%, while the other fibres are likely to grow at
slower rates.
New Projects
Polyester
RIL is increasing its polyester capacity by 550,000 tpa in phases between Q4 2005 and Q1
2006. The new capacities include 240,000 tpa of PSF in Hazira (Gujarat), 216,000 tpa of PFY,
also in Hazira, and 94,000 tpa of PFY in Patalganga (Maharashtra). A 500,000 tpa PTA plant is
scheduled for start up in 2007-08, while paraxylene capacity will be raised by 532,000 tpa to
1.95 million tpa.
Indo Rama Synthetics (I) Limited (IRSL) is increasing its PSF and PFY capacity significantly by
150,000 tpa each. The commercial production is scheduled to commence from second quarter
of 2006. The cost of project is likely to be Rs 9 billion. IRSL's expansion plan continues to be on
track both on costs as well as on time scale. IRSL has already signed all the loan agreements
with the prospective lenders. Orders have already been placed for all long lead items.
Garden Silk Mills has recently commissioned a continuous polymerisation (CP) project at
Village Jolva with a capacity of 200,000 TPA alongwith 50,000 TPA of direct spinning of POY.
The CP project will fulfill the Company's internal requirement of polymer/chips of about 270
tonnes per day (TPD) for the manufacture of partially oriented yearn (POY). The balance 330
TPD chips will be marketed. The second phase involving direct spinning project will be located
at Jolva adjacent to CP plant. The imported machinery is being ifnanced by Landesbank
Baden-Wuerttemberg, Germany. The plant is being developed on the outskirts of Surat at an
investment of around Rs 3 billion.
JBF Industries is implementing a grass roots 219,000 Polyester Chips plant. The estimated cost
of this project is Rs.1.7 billion and is scheduled to be completed in FY2007. The proposed
expansion will double the company's turnover by 2007. The promoters will also invest and
retain their holding at 39.57 per cent. The company has integrated manufacturing facilities in
Silvassa with capacities of 1,18,800 tpa in polyester chips and 60,000 tpa of PFY.
Bombay Dyeing and Manufacturing Limited too, in order to forward integrate, has announced
plans to put up a PSF manufacturing plant. The company is the largest manufacturer of one of
raw materials (DMT) required to produce PSF.
The significantly delayed 80,000 tpa polyester project of Southern Petrochemicals Industries
Corporation (SPIC) is in an advanced stage of implementation. However, the PTA unit in the
same project is still in preliminary stage. The project continues to face financial difficulties.
Nylon
SRF has planned investments of over Rs 6 billion by March 2007 to double its industrial fibre
capacity and also consolidate its position as a producer of polyester film. SRF plans to invest
Rs 3.5 billion to double production of industrial fibre capacity at Gwalior and Chennai to 50,000
tonne. With the fresh investment, SRF's Malanpur capacity will be doubled from 11,000 metric
tonnes of nylon tyre yarn to 24,000 metric tonnes, and 10,000 metric tonnes of nylon tyre cord
fabric to 17,000 metric tonnes.
Century Enka Limited is also planning to invest Rs.1.6 billion in expanding its nylon tyre cord
and nylon textile yarn capacity.
REVIEW OF P ERFORMANCE
The fluctuating fortunes of the Indian manmade fibres industry are typical of a commodity
industry. During the boom years, companies make bumper returns, while during the slump
years, the performance declines drastically.
Polyester Players
For manufacturers of polyester, material costs (in the case of both integrated and non-
integrated players) account for over 50% of the total cost of sales. The other important
variable cost heads are: power & fuel; and process chemicals & catalyst (included in stores
and spares).
Between 1996 and 1999, poor margins in the international polyester markets and local
over-capacity had been the main factors prompting the downslide in the Indian polyester
fibre industry. However, low fibre intermediate prices in comparison with polyester fibre
prices resulted in the margins for non integrated polyester manufacturers being higher.
The significant increase in global demand for polyester in calendar 2002 led to a sharp rise
in operating rates and global margins. This, along with the high operating rates in the
domestic market, led to a rise in margins for the non-integrated PFY manufacturers. Thus,
the margins and returns increased significantly between FY2002 and FY2004.
Large capacity additions in China post 2002 led to decline in global operating rates and
profitability. However, Indian polyester players were relatively better placed as the
operating rates in India were high and demand supply situation was nearly matched (after
accounting for capacities not operating). However, rising polyester intermediate prices and
declining cotton prices squeezed margins of polyester players resulting in decline in
operating margins of the Indian polyester industry and consequently, its returns during
FY2005.
Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 8568.2 8648.9 9531.6 8491.3 7687.9
Reserves 8557.2 7417.8 -9588.5 -5369.4 -1002.8
Networth 17096.8 15993.8 -227.3 2869.2 6375.3
Secured Debt 16907.5 20735.1 41817.4 41087.4 43063.0
Unsecured Debt 5404.5 4854.3 5604.5 4861.7 4487.2
Total Debt 22312.0 25589.4 47421.9 45949.1 47550.2
Deferred Tax Liability 3361.2 2871.0 2382.7 1052.1 0.0
Total Liabilities 42770.0 44454.2 49577.3 49870.5 53925.5
Gross Block 65499.1 66594.1 70208.8 70092.8 68061.9
Net Block 34913.6 37417.5 40565.9 42861.8 44201.4
Capital Work in progress 2342.5 973.5 2948.4 2623.7 2539.7
Investments 1085.8 3000.3 1917.7 1932.9 1988.5
Inventories 8298.5 8940.4 9465.6 6542.7 6802.9
Receivables 4054.6 3241.3 4139.8 4317.4 4977.6
Cash 719.4 889.5 678.6 741.1 684.3
Loans & Advances 2321.9 2103.4 2665.7 1704.0 2367.9
Earlier, the over-capacity in the local polyester market as well as the relatively small
capacities of average Indian plants had resulted in the returns being low (negative in many
cases). In fact, some small capacities with no integration even reported complete erosion
of net worth. The companies that have turned around with large help from the increase in
industry margins, are the ones with medium and large sized capacities (>30,000 tonnes
per annum, or tpa).
RIL, on the other hand, with its large capacities and highly integrated operations, has
withstood the cyclical downturn without having its financial strength significantly impacted.
Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 13930.9 13959.5 13959.2 13958.5 10534.9
Reserves 390102.3 330565 289784.9 264794.1 137118.8
Networth 404033.2 344524.5 303272.6 278124 147653.7
Secured Debt 79729 114511.4 117768.6 141888.9 40684
Unsecured Debt 108116.9 94935.2 79814.5 47395.9 60673.9
Total Debt 187845.9 209446.6 197583.1 189284.8 101357.9
Deferred Tax Liability 42668.2 34748.2 26848.2 20608.2 0
Total Liabilities 634547.3 588719.3 527703.9 488017 249011.6
Gross Block 551258.2 535029.1 505529.9 467273.2 253559.9
Net Block 302529.9 317891.7 320918.3 316504 135144.6
Capital Work in progress 48292.9 33568.1 19944.4 15333.1 5123.8
Investments 170514.6 139714 67227.2 38501.6 67261.1
Inventories 74128.8 72312.2 75104.1 49740.7 22998.5
Acrylic Players
The acrylic fibre industry is characterised by very high raw material costs. The other high cost
heads are catalyst, process chemicals, and consumables. However, as the polymerisation of
acrylonitrile (ACN) happens at an extremely rapid pace, and at normal temperature and
pressure, the operating costs in the acrylic industry are lower. The only operating costs are the
costs of conversion to fibres. The cost structure of non-integrated acrylic fibre manufacturers is
not readily comparable with that of the integrated manufacturer, IPCL, as the latter is highly
diversified and the contribution of acrylic fibres to its overall business mix is very small.
In line with the trend in margins over raw material, the gross margins of the Indian acrylic fibre
industry declined significantly during FY1999-FY2001. The net margins and margins after
accounting for capital charges had been positive only in FY1998, which is a pointer to the
industrys low profitability. Several factors such as low plant size, over-capacity, high power
costs and high interest costs have contributed to this low profitability. In line with the trend in
gross margins, the returns of ASF players also declined significantly in FY1996 and FY1999.
The industry (apart from the integrated diversified player, IPCL) is characterised by very low
returns; overall, the industry declared positive shareholder returns only once during the last five
years. The returns (including debt holders returns) for the Indian companies have been higher
than the prevailing interest rates in only one of the last five years, which further points to the
poor profitability of the business.
Starting FY2002, the margins in the acrylic fibre industry have been on an upswing. Th e faster
rise in demand with slow rise in capacity have resulted in the higher operating rates. Even
though, the acrylonitrile prices were also on the upswing (because of increasing crude oil and
rising propylene prices), the higher increase in fibre prices helped the fibre producers. Thus, the
operating margins and returns have increased significantly between FY2002 and FY2005. The
consolidated ROCE of the acrylic fibre industry has improved from 3.6% in FY2001 to 15.8%
in FY2005.
Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 2755.5 3948.9 3890.9 3881.8 3771.5
Reserves -1102.5 -2455.6 -2087.9 -1788.6 -1145.2
Networth 1651.7 1491.4 1798.5 2085.1 2615.5
Secured Debt 2909.7 5284.8 5015.2 4945.7 5102.2
Unsecured Debt 633.6 498.4 777.6 604.7 700.6
Total Debt 3543.3 5783.2 5792.8 5550.4 5802.8
Deferred Tax Liability 23.2 0 0 0.0 0.0
Total Liabilities 5218.2 7274.6 7591.3 7635.5 8418.3
Gross Block 8651.1 11823.8 11785.6 11552.8 11037.5
Net Block 4645.4 6484.7 7032.7 7286.1 7448.0
Capital Work in progress 50.5 80.9 75.7 123.3 100.3
Investments 15 207.8 6 6.0 0.0
Inventories 1156.7 1427.9 1320.2 1169.1 1348.2
Receivables 115.2 430.7 443.5 497.1 580.7
Cash 111.9 731.7 212.7 150.9 85.9
Loans & Advances 249.4 235.6 251 207.1 331.5
Total Current Assets 1633.2 2825.9 2227.4 2024.3 2346.3
Current Liabilities 1089.1 2280.6 1706.5 1777.1 1432.6
Provisions 36.8 44.1 44 27.0 43.6
Total Current liabilities 1125.9 2324.7 1750.5 1804.2 1476.2
Net Current Assets 507.3 501.2 476.9 220.1 870.1
Total Assets 5218.2 7274.6 7591.3 7635.5 8418.3
Nylon Players
Material costs, mainly caprolactam costs, account for nearly 50% of the cost of sales of nylon
manufacturers in India. The other important cost head is power & fuel. Power & fuel costs are
the highest for nylon, among all manmade fibres.
Till FY1999, the gross margins for nylon players in India declined significantly on account of the
global decline in the conversion margins of caprolactam nylon. Indian Caprolactam nylon
margins improved during 2001 following the rise in global margins. With significant increase in
price of benzene (caprolactam is derived from benzene) during 2004, the margins in global
market declined resulting in decline in profitability for Indian players as well. The returns for
nylon players have followed the same trend as their margins.
Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 941.9 1524.1 1524.1 1524 1537.7
Reserves 9557.3 8022.5 7474.1 7128.6 8023.1
Networth 10499.2 9546.6 8989.1 8614.7 9487.3
Secured Debt 5816.9 3381.1 3772.2 4569.2 5574.1
Unsecured Debt 723.9 255.3 346.4 651.2 1106.2
Total Debt 6540.8 3636.4 4118.6 5220.4 6680.3
Deferred Tax Liability 2288 2080.6 1762.3 1448.7 0
Total Liabilities 19328 15263.6 14870 15283.8 16167.6
Gross Block 25147.2 23106.2 22999.2 22771.4 22437.4
Net Block 13181.6 10837.8 11259.1 11666.2 12101.5
Capital Work in progress 2091.8 1008.9 221.6 302.3 494.1
Investments 1157.4 1490.3 1107.3 1262.3 1189.3
Inventories 3383.9 2458 2445.6 1872.5 2116.6
Receivables 1453.6 1435.7 1556.7 1635.1 1600.2
Cash 178.2 609.9 316.9 314.6 356
Loans & Advances 1246.1 944.8 1088.9 903.6 1206
Total Current Assets 6261.8 5448.4 5408.1 4725.8 5278.8
Current Liabilities 2737.7 2899.2 2599.9 2205.6 2316.2
Provisions 626.9 622.6 526.2 467.2 579.9
Total Current liabilities 3364.6 3521.8 3126.1 2672.8 2896.1
Net Current Assets 2897.2 1926.6 2282 2053 2382.7
Total Assets 19328 15263.6 14870 15283.8 16167.6
Viscose Players
In the viscose staple fibre (VSF) industry in India, material costs form a lower percentage of the
cost of sales as compared with the other fibres, indicating higher value addition by the industry.
The process of manufacture of VSF is highly power-intensive as highlighted by the high power
cost as percentage of cost of sales. The fixed costs for the larger player, Grasim Industries
Limited (GIL), are lower than those for the smaller one, SIV Industries, because of scale
economies. Further, the presence of GIL in other businesses like cement complicates the cost
structure (GILs freight costs are higher).
The profitability of viscose fibre manufacture hinges on the prices of its substitutes. With the
prices of polyester in the global and local markets declining from FY1995 to FY1999, the gross
margins for domestic VSF players also declined. In FY2000 and later, the local VSF
manufacturers finally saw an uptrend with the cost-push impact of rising crude oil prices leading
to an increase in the prices of substitutes (mainly polyester). With increase in demand for VSF
globally, the operating rates and consequently, the margins have been on the rise post 2002.
In line with the decline in margins, the returns of the domestic VSF players also fell till FY1999,
but increased thereafter. However, for the small capacity player, SIV Industries, the continuing
losses resulted in the companys net worth turning negative in FY2000. The large sized player
has increased its revenue from the VSF business with rising sales volumes of VSF.
Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 916.9 916.9 2208.1 2208.1 2208.1
Reserves 42366.6 35191.4 24484 22977.9 27500.4
Networth 43283.5 36108.3 26692.1 25186 29708.5
Secured Debt 14725.5 13561.4 21435.7 21243.1 20346.1
Unsecured Debt 5357.9 7090.9 6356.1 5597.8 4485.6
Total Debt 20083.4 20652.3 27791.8 26840.9 24831.7
Deferred Tax Liability 5995 6325 6255 6405 0
Total Liabilities 69361.9 63085.6 60738.9 58431.9 54540.2
Gross Block 59107.7 57281 61449.1 59046.8 58762.6
To a large extent, these factors determine the profitability and cost structure of a manmade
fibre company while later efforts are focused more on managing the facilities efficiently and
effectively. The following analysis brings out the key success factors not only for the existing
manmade fibre operations in India, but also the upcoming ones.
Enhancement of Capacities
Whether a new manmade fibre player plans a grassroots project or an existing player plans an
expansion, it has to make a choice on capacity, fibre mix, level of integration, and technology to
be used. Further, its skill in actually implementing the project is vital for the future.
Careful Planning of Medium and Long Term Trends: Capacities, Level of Integration and
Timing
Capacity size, level of integration, and timing of the project are critical for the overall success
and profitability of a manmade fibres manufacturing company. The decisions regarding these
choices are to be made at the planning stage of the project on the basis of the medium- and
long-term industry trends. Accurate forecasting of these trends is vital for the success of a
manmade fibres company.
Synthetic Fibre Capacities
High capacities provide a player an opportunity to minimise fixed costs. Given the advantages
2
of economies of scale , every player would like to set up the largest capacities possible.
However, the eventual capacity gets restricted by the extent of unmet demand in the market,
besides the players financial strength (discussed later). It is critical that the manmade fibre
company concerned accurately predict the extent of unmet demand. If it predicts too large a
capacity, there would be an over-capacity in the market in the initial years when the plant
2
the per unit poly-condensation cost is lower, standby manufacturing facilities are distributed over larger
production, per unit fixed costs are lower, and bargaining power in raw material procurement is higher
comes on stream. On the other hand, if the capacity predicted is too small, the company may
not be able to achieve the desired economies of scale. The choice of fibres to be produced is
also vital for the overall profitability of a project.
Integration
Integration of a product with its raw materials allows a manufacturer have greater control over
operations. Besides, integration of a petrochemical plant with its downstream units and utilities
has many advantages on its own. Integration provides the opportunity for optimum investment,
best high capacity operation, safety, optimum energy utilisation, and other economic
advantages. Since all the intermediates in an integrated petrochemical complex are produced
and used captively, such complexes have lesser storage requirements for intermediate
products. This leads to lower transportation costs, fewer storage hazards, and minimal statutory
taxes. By integrating all the utilities such as those for steam, power, de-mineralised water,
process water, cooling water, refrigerant nitrogen, and process air, not only is the investment
requirement optimised but higher efficiency is also provided for. Integration reduces the overall
energy and utilities costs, which account for 15%-20% of the variable costs of a petrochemical
complex. Besides the company-intrinsic factors mentioned, because the fibre intermediates
industry is in fewer hands (both globally and locally), the bargaining power of the intermediates
industry is higher, and consequently, they share a higher amount of profits vis- -vis the
downstream fibres industry. Also, the returns of a company have lesser risk when it is
integrated than otherwise.
Timing
Worldwide, petrochemical markets (including the ones for fibres and fibre intermediates) are
characterised by cyclicality in margins, caused by the collective implementation and operation
of capacities by various players. If a player times a project in such a way that it starts operating
at the upswing, possibilities of significantly enhancing shareholder value are high. But to
determine the upswing, the player must be able to predict the global demand and supply trends
accurately. Besides, the player would have to have adequate financial strength to implement
the project.
Financial Strength
Petrochemical projects are capital intensive and require large capital for establishment. The
project cost for a fibre (and fibre intermediates) manufacturing facility is substantially higher
than that for a downstream plant alone. Given the high project cost, financing becomes crucial
and can play a critical role in determining the profitability of the project during the course of its
operation. Further, if a high amount of debt is used, the cost would be high during the initial
years of operation and this would impact profitability significantly.
Capital Cost
The cost of setting up a manmade fibre project determines, to a great extent, the production
cost of fibres, and consequently, the profitability of a manmade fibre company. For a manmade
fibre facility, the plant & machinery cost is the single largest contributor to the project cost. The
actual plant & machinery cost varies with the technology used. Further, significant economies
can be achieved by setting up large capacities. The project cost also has a significant
contribution from the interest capitalised during the course of the project.Costs apart, a critical
factor in the construction of a manmade fibre facility at competitive terms is project
management skill (since construction time is of vital importance).
Selection of Technology
Since cost efficiencies are of vital importance, the employment of the latest and best
technology is essential. Low-cost, efficient technology is especially important in the wake of
narrowing margins. Thus, while new plants use 0.852 tonne of PTA per tonne of partially
oriented yarn (POY), the older ones use 0.91 tonne. Similarly, while the new plants use 0.335-
0.35 tonne of MEG per tonne of POY, the older ones use 0.37-0.38 tonne. Chip to fibre
manufacture involves significant quality considerations and the process can be used in various
ways (by altering process parameters) to yield different fibres for different requirements.
Further, significant losses can occur on account of poor drawing of POY, which in turn would
impact the overall yield of the process. Manufacturers save on these losses by investing in fully
automated processes of yarn/fibre manufacturing.
Location
Finished manmade fibres have a high freight cost element. While polymers have a freight cost
component of US$200 per tonne from the US to South Asia, fibres have US$400 per tonne as
the freight cost component between the two regions. Therefore, proximity to markets is a key
issue and players locate their facilities close to the texturisers and weavers. Thus, major
capacities in the Indian market are located on the West, the major textile centre in the country.
Further, acrylic fibre capacities are located in the Northern region, the major knitwear centre.
O UTLOOK
With the global economy expected to continue to show strong growth, demand for textile fibres
is also expected to continue its high growth path. Global polyester demand is expected to
increase at over 4% per annum during 2005-08, which is lower than the growth rates of 4.8%
and 9.7% per annum achieved during 1998-2002 and 1994-98, respectively.
Global PSF demand is expected to grow at over 3% per annum till 2008, which is lower than
the 5.1% achieved during 1998-2002. Chinese PSF demand is expected to increase at a rate of
over 6% per annum till 2008, which again is lower than the 12.5% achieved during 1998-2002
and would depend upon the performance of Chinese textile industry in post quota period
especially when some of its textile articles are expected to continue to face restraints.
Global PFY demand is expected to grow at the rate of over 4% till 2008. Chinese demand for
PFY is expected to increase at 7% per annum over the same period, which is significantly lower
than the 18% achieved during 1998-2002.
However, the capacity additions in polyester fibres (mainly in China and India) are expected to
be faster than the increase in demand till 2006, with the result that the operating rates are likely
to decline till 2006. Further, polyester intermediates are expected to show strong operating
rates and margins till 2006, with the low global profitability of polyester manufacturers
continuing over short to medium term.
The quota system in the textile sector has disappeared with effect from January 1, 2005, and
international trade in textile and clothing is now conducted on a non-discriminatory basis
(between WTO members). Although this will result in the market increasing for the developing
nations (including India), the guarantee of quota will not be there, even as competition would
increase and regional bloc agreements would assume greater importance.
With China being highly competitive in textiles and clothing and large exporter of clothing
(share of more than 20% already), it has potential to acquire a substantial share of the increase
in market for developing countries. However, with China having joined WTO later in 2001, the
developed countries can impose economic safeguards (till 2007) in order to limit Chinese
growth. The ability of other developing countries (including India) in competing with China
would be crucial for growth in exports from developing countries. The increased competition will
not only affect India in the export markets but also threaten domestic producers with imports
(especially in the high end premium fabrics and apparel). In May 2005, the US imposed
restraints on China on the following products:
Recently, EU has also imposed restraints on ten categories of textiles imported from China.
This is likely to help other developing countries including India.
Because of the accession of world textile and apparel trade to WTO framework, India's textile
producers all face, primarily, the same challenge: to raise productivity through gains in
efficiency that will still allow them to compete with imports; and continue to expand abroad in
the face of higher cotton prices resulting from conformance with WTO rules and demand
pressures. The new textile policy is a step to improve productivity and provides the right signals
to various investors to modernise their facilities. Further, the technology upgradation fund
scheme provides soft loans to the textile companies so as to improve their productivity. The
extent of improvement in the level of modernisation would be the key determinant of long-term
performance of the largest sector of Indian industry and its exports. However, as against a
worldwide share of manmade fibre consumption of over 50%, manmade fibre based textiles
account for only 15% of Indian textiles and clothing exports. The share of manmade fibre based
textiles is restricted on account of high excise duties on the same. For strong growth of textiles
and apparel exports post WTO accession, the share of manmade fibre based textiles and
clothing exports would have to be significantly increased in order to address larger portion of
world textiles and clothing market.
Historically, the Government had been levying much higher excise duties on synthetic fibres
and yarns in comparison with cotton. However, over the last decade, the excise duties on
synthetic fibres and yarns have been lowered. This process is expected to continue, thus
eventually removing the excise bias against manmade fibres.
The demand for polyester in the domestic market increased at the fast pace of over 15% till the
late 1990s. Currently, polyester accounts for a significant 40% share of the countrys total fibre
consumption (for ultimate use in the domestic market, the share is even higher at around 55%).
Further, the weaving industry finds it difficult to export synthetic fibre based textile goods on
account of high excise duty on polyester as also its own weaknesses. So far, the growth of
textiles and clothing exports from the country has been high post January 1, 2005, which is
likely to continue over medium term in light of restraints of growth on Chinese exports by
leading importersUS and EU. Thus, with slow growth in domestic market and strong growth
in exports, the textile industry and in turn, demand for manmade fibres, is likely to show
moderate growth in turnover.
Polyester Margins: Going forward, over the short term, the prices of raw material (fibre
intermediates) are likely to remain moderately high on account of high petrochemical margins
(on account of increasing global operating rates) and high crude oil prices. The prices of
manmade fibres would remain linked with cotton prices as also average operating rates of
manmade fibre industry both at regional and global level. Cotton prices at the global level are
expected to stagnate at their low levels. The global operating rates in manmade fibres are likely
to remain low mainly on account of significant increase in the capacity in China. With significant
capacity being commissioned, the polyester industry in India is likely to witness over-capacity
over the medium term unless the exports of textile and clothing increase significantly. With fibre
intermediate margins likely to remain high over short to medium term, the non integrated
players are likely to continue to witness low margins. Further, high excise duty on the manmade
fibres vis- - vis cotton would continue to deter the fabric producers from purchasing high
volumes of manmade fibres. Overall, thus margins of manmade fibre producers are likely to
remain under pressure in the short to medium term, albeit to a lesser extent then during
FY2005.
AN N E X U R E 1 . P O L I C Y R E F O R M S I N T H E I N D I A N T E X T I L E I N D U S T R Y
While the quotas put restraints, they also protected the share of developing country in textile
and clothing exports. While Indian yarn exports have a large share in the world, same is not
true about the apparel sector. Thus, the industry need to add significant value to its product
profile. To safeguard against the risks posed by the liberalising trade of textiles in the
international market as also increased competition, the Government of India has announced
several measures in the past in order to vitalise the textile industry and increase its productivity.
In November 2000, the Government of India came out with a new textile policy (refer following
figure) that outlines the direction of policy reforms to be followed in the near term. The steps
outlined in the policy are geared mainly towards removing the bias in policy towards the small-
scale sector and promoting modernisation. The Government removed readymade garments
subsequently from the list of products reserved for the small-scale sector.
The Government announced the technology upgradation fund scheme (TUFS) in 1998 that
provides for soft loans to textile companies so as to enable them to improve their productivity.
The Government has also announced several fiscal steps in last five-year budgets aimed at
improving the efficiency of the textile sector (refer following table).
With the removal of the protectionist bias in favour of the small-scale sector, the long-term impact of the
reforms on the industry is expected to be significantly positive. With textiles trade coming under the
ambit of the World Trade Organisation (WTO), an inefficient weaving sector could have posed a serious
problem for the Indian textiles industry. The policies drawn up to encourage investments in installing
modern weaving machinery as well as the removal of policy measures that have hitherto protected the
decentralised sector, are expected to provide a boost to the textiles sector as a whole over the long term.