http://www.dailytimes.com.pk/default.asp?page=story_12-8-2005_pg5_14

High oil prices threaten survival of textile, cement sectors

By Mshfiq Ahmed

KARACHI: The latest increase in international oil prices to a record $65 per barrel has crippled the industry depending on the bi-products of the crude oil or using it as raw material while the most important textile sector of the country is bound to pay a heavy price for the escalating crude oil prices.

Rising international crude oil prices, which have touched the $65 per barrel mark, is going to raise the cost of production of the local textile industry as well as of polyester staple fibre.

The cut-throat competition with the entry of China into the textile world in the WTO quota-free regime has already made it extremely difficult for the export-oriented textile sector of the country to survive. Even the local Pakistani market might be captured by cheaper Chinese products. The threat is even larger if seen in the context of India trying to penetrate into the Pakistani market with cheaper goods.

“Whenever the oil prices rise, the cost of producing polyester staple fibre rises, which leaves it uncompetitive against cotton,” said Khuldoon Bin Latif, an analyst at AKD Securities.

If the cotton production drops, the country might have to face double problem as the textile sector will have to use PSF, a bi-product of oil, as an alternative to the raw cotton.

Last year the country received a record production of cotton, which touched the figure of 14.5 million bales. This huge production saved Pakistani textile industry from using PSF and kept it competitive in the world textile market. However, the situation might change once the textile industry faces a shortage of raw cotton. Then the use of PSF will increase the production cost too high to compete with China.

China has dumped its textile products both in United States and in the European Union, replacing traditional exporters in these two markets. Pakistan is facing a tough situation after abolishment of the quota system and implementation of the quota-free regime.

“The free regime is not in favour of small players as giants like China can afford to drop their prices of products to bottom level and still be able to survive,” said Hamood Khan, a textile exporter.

Another important aspect was that cotton prices fell to Rs 1,800 per maund, which helped the textile sector to remain its competitiveness and it hit the sales of polyester staple fibre producers.

However, Mr Latif, an analyst, said, since the new cotton crop is going to be around 13 million bales, this year is going to be a “much better year” for the PSF. Analysts said those textile units would be more hurt by the rising international oil prices, which had installed their own power generating units. The cost of production for other textile factories would also rise, but not drastically, they said.

Cement price to rise due to transportation cost: On the other hand, the transportation cost is going to rise for the cement manufacturers, which will give them a reason to increase the prices of their various products. Cement prices are already very high due to the increasing demand by the local, Afghan and Middle East construction industries. However, their cost of production is not going to rise due to skyrocketing oil prices, because most of them now rely on coal and gas. They used to use furnace oil two years ago for the production of cement. Now they have switched to coal and gas, said Nomanul Haq, an analyst at Arif Habib Securities.

The Oil Companies Advisory Committee was expected to raise the price of POL products in its fortnightly review, said analysts. It has kept the prices unchanged in its last two fortnightly meetings. It had increased the price of petrol by Rs 3.41 and Rs 48.94 while the oil marketing companies (OMCs) had raised the diesel price by Rs 2.68 and Rs 31.74 per litre on July 1.

The price of kerosene oil was raised to Rs 29.53 from Rs 27.98 per litre while the price of light diesel oil (LDO) was increased to Rs 27.84 from Rs 26.39 per litre. The rate of HOBC was increased to Rs 54.33 from Rs 50.52 per litre.

Oil marketing companies to gain: The oil marketing companies of the country are getting benefits from the rise in international oil prices, because their margins improve with a surge in the prices of their products.

“If the government does not cap the local oil prices, their profits will rise tremendously,” said Hasnain Imam, an analyst at a local brokerage house. “Even if the government does not allow the prices to rise, they will be benefiting because the government compensates them for the losses they suffer by keeping prices low.”