Events seem to have come full circle for Reliance Industries, with the company once again turning to polyester, the fibre which helped script its success story in the 90s, for its new growth plans.

The company has announced plans to “consolidate its position” as the “world's largest integrated polyester producer” by putting up new capacities for polyester filament yarn and texturised yarn at Silvassa.

It will also add capacity for key intermediate — PTA (purified terephthalic acid). Plans are also afoot to expand the capacities for packaging material PET (polyethylene terephthalate).

Pricing power

So why is Reliance Industries scaling up its polyester business, which went through an boom-bust cycle in the 90s? First, a gradual shift in Indian fibre demand away from cotton and towards synthetics has been driven by steadily rising prices of cotton, among other factors. Cotton prices have more than doubled in the last 15 months, allowing makers of man-made fibres, including polyesters, greater pricing power. Polyester staple fibre (PSF) prices have increased 48 per cent in the last 15 months according to data with the Ministry of Textiles. Fairly tight supplies of the fibre have also allowed price increases. For polymers such as PET, rapidly expanding sales of the domestic consumer and food companies, have been a key demand driver. Reliance points out that PET “is poised for exponential growth” due to demand from the bottling, packaging and food industries.

The pricing power of RIL's petrochemicals segment is reflected in its operating margin increasing to 15.2 per cent in the recent December 2010 quarter, up from 14.6 per cent in the September quarter and from 13.9 per cent in the December 2009 period. The recent December quarter was the best ever for the company's petrochemical segment in terms of production, revenue and operating profits. This reflects an uptrend and strong demand conditions in the cyclical industry, which was not much affected by the commissioning of new global capacities.

Flush with cash

Though the quantum and time-frame of the proposed investments have not been disclosed, these expansion plans are expected to be characteristically big-ticket and would further bolster Reliance's strong position in the petrochemicals segment. Funds for expansion should not be a worry, with the company's cash reserves as on December 2010 at a comfortable Rs 31,829 crore ($7.1 billion). The recent $7.2-billion deal with BP will also add significantly to the company's liquidity.

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