Construction was one of the major drivers of the chemicals sector in FY16 which led to a growth of 8 percent. As per the recent SBP report, FY17 saw the chemical sector decline by 2.3 percent despite construction and its allied industries remaining strong. What went wrong?
When export-oriented sectors such as textiles and leather suffer, there is a huge hue and cry with articles about Pakistan losing ground in the international market, impact on foreign exchange reserves, policies supporting and facilitating exports and so on and so forth. Often overlooked are all the other sectors that depend on textiles to do well to continue to flourish.
The textiles sector is a major consumer of chemicals in Pakistan. For example, caustic soda takes the lead in domestic chemical production and textiles absorb 50 percent of it.
While at 17, the chemical sector of Pakistan does not account much for weight in LSM, it does account for 30 companies on the PSX that are listed under chemicals, many of which are linked with or supply to the textile sector.
Among them, companies such as Sitara Chemicals have felt the impact of the troubles of the chemical sector, reporting low single digit in FY17. Lottechem’s latest quarterly reported a decline in revenue as compared to the same period last years, as they were adversely impacted by crude oil price patterns as well as decline in polyester demand.
Others such as Descon Oxychem managed to increase sales through improved marketing mix and selling prices. Archroma’s increase in quarterly sales was led by their business in paper specialties.
Textiles sector is not the only culprit for the fall in chemical production in Pakistan, though it is a major one. Several of the chemicals companies have expressed fears regarding dumping, especially from China. For example, there has been a slowdown in construction activities in China.
This has caused their supply of chlorine to stockpile, dragging down chemical prices across Asia and increasing supply in the local market through imports. On the other hand, the petrochemicals segment of Pakistan is suffering due to volatility in crude oil prices with the current slump discouraging production.
While Pakistan may have limited ability to contract international trends, it needs to work on developing its smaller auxiliary sector which in this case contributes by production worth over Rs200 billion as per Pakistan Chemical Manufacturers association. Pakistan’s narrow export base, lack of industrial infrastructure and technology and domestic policies are weakening the chemical industry.
If the government does not work towards supporting and promoting the sector, it could very well continue to fall through the cracks.
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