Unarguably, textile is the backbone of Pakistan’s exports. Though smooth supply is essential for its growth in domestic and international markets, running afoul of the chemical sector is one of the myriad challenges it faces.
This space has previously highlighted the conflicts between the two sectors. One such battle that waged earlier this year was the higher prices and shortage of hydrogen peroxide, also known by its chemical composition of H2O2. (Read “Textile and chemical conflicts – H2O2”, published on March 13, 2018)
Hydrogen Peroxide has a variety of uses but its main customer is the textile sector in which it is used for dyeing and bleaching processes. Currently, the local market is duopolistic with Descon Oxychem holding about 51 percent of the share and Sitara Peroxide having approximately 34 percent of the market. The rest is supplied by imports which are tariffed at 11 percent.
On one hand domestic producers argue that the tariffs are essential for import substitution to the tune of about $24 million. Sitara and Descon have over the years approached NTC for anti-dumping duties as well. Textile sector on the other hand argues that since domestic capacity is unable to fulfill local demand by about 10,000 tons, they should have freer access to H2O2.
This conundrum is being solved by Engro Polymer & Chemicals that recently account $23 million investment to enter into a greenfield investment of hydrogen peroxide. Its notice to the PSX stated that currently, the hydrogen derived from its caustic manufacturing process was being used as fuel. The company did not consider this the best form of value creation for the gas and hence was entering into the hydrogen peroxide business.
This is good news on my levels. Firstly, imports comprise of about 16 percent of the market so EPCL’s investment enhances import substitution. Secondly, as yet hydrogen peroxide is absorbed locally due to supply constraints. Surplus may now be exported, especially since All Pakistan Chemical Manufacturer’s Association (APCMA) has claimed in the past that local manufacturers have option to export at much better prices but are constrained due to domestic demand.
Thirdly, and most importantly, the biggest beneficiary of EPCL’s diversification will be the textile sector. Descon is planning expansion by about 25 percent by 2020. With Descon’s enhanced capacity and EPCL’s investment, H2O2 supply will increase significantly ensuring that textile sector’s woes of insufficient availability of hydrogen peroxide are addressed. Increase in supply may also make prices more competitive enabling the textile sector’s margins to improve. Thus, EPCL’s investment should remove one bone of contention between the chemical and textile sector.
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