New Delhi: It might be bad news for the user industries. But firm polyester prices are providing much-needed comfort to Reliance Industries. Polyester, widely used in apparels and home furnishings, has seen its prices hold firm. Even though cotton prices have corrected significantly, tight supplies and firm demand are helping polyester prices.
J.P. Morgan said in a note dated 21 November: ‘Cotton prices have fallen 50-55% from their March highs. However, polyester fiber/yarn prices have fallen only 26%/13% - margins have had an even smaller correction (10-12%). Differential between cotton-polyester fibre is currently at $600-800/MT (15 year average $400-500), with PSF/cotton price ratio at 0.7x (15 year average 0.8x). Pricing headroom should help sustain remunerative margins.’
Polyester, which comes under the petrochemicals business, is the biggest profit earner for the company. The petrochemical business contributed 37.2% of Reliance Industries’ last year profits before interest and taxes. According to J.P. Morgan, the polyester business contributes around 60% of the company’s earnings from petrochemicals.
Even though the E&P business is more profitable, the company made more money from the petrochemicals business on an absolute basis (the segment’s profits stood at Rs 9,540 crore last year). In the first six months of the current financial year, the petrochemical business contributed one-third of the company’s earnings before interest and taxes. Incidentally margins from the refining business are also under pressure.
Not surprisingly Reliance Industries is putting more money in the polyester business. The company is almost doubling its polyester chain capacity. The new capacities are expected to come on stream by 2014-15.
Mukesh Ambani, chairman of Reliance Industries said at the company’s annual general meeting in June this year that pressure on land to meet increasing demand for food will limit availability of cotton. This augurs well for polyester demand in growth markets like India.
Ambani added that they had recently announced the world’s largest expansion in Polyester chain comprising 1.8 million tonne of Paraxylene, 2.3 million tonne of Purified Terephthalic Acid, 0.7 million tonne of Mono Ethylene Glycol, 0.65 million tonne of Polyester Resin, 0.4 million tonne of Polyester Filament Yarn and 0.3 million tonne of Polyester Staple Fibre. This expansion will further increase the company’s polyester capacity to 3.6 million tonne.
Broadly three factors are helping polyester prices. Stable demand, volatile cotton production and cost push pressures (high crude prices).
But there’s one problem: high input costs and subdued demand in the overseas markets is a cause of concern. While strong demand in the domestic market provides some cushion, any sharp contraction in global demand and increase in supplies could put pressure on the polyester prices. Yogesh Patil of KR Choksey says, ‘Petrochemical plants are lined up in the Middle-Eastern region. While these would increase capacities, weak demand in the developed markets could put pressure on the petrochemicals margins.’
While polyester prices are ruling firm at present, steady demand is crucial for the polyester prices to stay firm. The risk for Reliance Industries’ polyester business is that higher capacities and subdued demand could put downward pressure on prices in future.