LOTPTA: venturing further

For a news-thirsty, much dejected market, any upbeat report regarding expansion and diversification plans is likely to become a springboard of positive momentum.
Such was the case with the announcement of capacity expansion by Lotte Pakistan PTA Ltd (LOTPTA) - the sole producer of PTA in the country - with the companys scrip up by 2 percent last Thursday, and its volumes contributing 30 percent of total volumes at KSE that day.
With a capital outlay of $400 million, capacity enhancement will increase PTA production, up from the 500,000 tons the company produces currently. Although the company has not indicated any approximation of the increase in production, the guesstimate circulating amongst analysts is an additional 0.5 million tons.
Going by this estimate, Lottes production capacity of PTA will rise to 1 million tons. Currently, PTA demand stands at around 600,000 tons in Pakistan, with the shortfall being met through imports.
Adding weight to Lottes plans is Ibrahim Fibres Ltd, a leading PSF manufacturer in the country, which is planning to almost double its PSF manufacturing capacity, thus buoying up demand for PTA further in future.
Company sources revealed that an additional demand of over 200,000 tons is likely to be generated from Ibrahim Fibres capacity enhancement.
With cotton prices in the country at record levels, PSF demand has been stimulated considerably, presenting a positive outlook for derived PTA demand.
Besides, PTA margins have been faring well, with the PTA margin over PX 20 percent higher in CY10 compared to the previous year. And they "are expected to remain healthy for the foreseeable future" according to Lottes annual report for the year.
Such dynamics render the move by LOTPTA a favourable one.
But the prick in the picture comes from the reduction in duty for PTA imports, which makes it tough for LOTPTA to sustain its competitiveness. The company claims with the already-expensive PTA production due to higher power costs, import tariff at 3 percent, lower than that of regional players, such as China and India (6.5 and 5 percent respectively), makes the situation more precarious for Lotte.
Therefore, a definite timeframe to roll out the plans has not been shared by the company. Sources revealed that LOTPTA would be further assessing the various details of the project such as expected timeline and quantum of enhanced capacity, etc.
Similarly, while nothing concrete has been disclosed about the mode of financing the project, the companys healthy cash flows and a strong leverage position are likely to help LOTPTA in funding the project.
Overall, the move is likely to boost Lottes earnings considerably, though the resolution of the low duty on PTA imports remains a very critical issue.