Protecting monopolies

Producers of polyester fibre allege that the imposition of anti-dumping duties on PTA protects the monopoly in the industry.

At a garment manufacturing unit near Kochi. Synthetic garments account for 20 per cent of garment exports.

INDIA’s biggest conglomerate, Reliance Industries, is back in the thick of controversy. And, not surprisingly, it has to do with government policy. This time, it pertains to an area of business that goes back to the company’s very beginnings in the 1980s as a manufacturer of a key chemical intermediate that is critical to the production of synthetic textiles, purified terephthalic acid (PTA).

Soon after the Narendra Modi government assumed office, on July 25, the Directorate General of Anti-Dumping and Allied Duties (DGAD), which functions under the Department of Commerce in the Union Ministry of Industry and Commerce, imposed anti-dumping duties on imports of PTA originating from China, South Korea, Thailand and the European Union. The investigation of the DGAD, covering the period from April 1, 2012, to March 31, 2013, was based on a complaint from Reliance Industries and Mitsubishi Chemical Corporation PTA India Corporation Private Limited (MCPI), a part of Mitsubishi Keiretsu, and commenced in October 2013 during the United Progressive Alliance regime. Based on its findings, the DGAD imposed anti-dumping duties ranging between $19 and $117 a tonne, depending on the quality of the PTA imported from these countries.

The DGAD’s action obviously protects the two main producers, Reliance and MCPI, which account for almost 87 per cent of the installed capacity for producing PTA in India. The third producer, the public sector Indian Oil Corporation, is only a marginal player. Significantly, it found no reason to complain about dumping by overseas producers. Users of PTA, among them large companies like Bombay Dyeing, Indo Rama Synthetics and Garden Silks, have vehemently contested the DGAD’s ruling, pointing to several anomalies. They said that the increase in the prices of PTA following the imposition of penal duties on imports from the targeted countries would affect not only them but also more than 20,000 smaller textile companies that employed thousands of workers. The PTA Users’ Association, which represents the interests of many of these companies, has complained that the increase in the costs of manufacturing synthetic textiles is likely to make Indian companies uncompetitive in the global market.

Indo Rama Synthetics (India), a leading producer of polyester fibre and yarn, alleged that the anti-dumping duties had been imposed “in a hurry”. It estimated that the additional duty on imports from China would amount to $62.82 a tonne, $117.09 in the case of inflows from South Korea, and $99.51 on imports from the other targeted countries. The company said the move would “highly impact the polyester fibre chain” in India.

The company’s chairman and managing director, O.P. Lohia, said the additional duties would have “a huge impact on the margins of the polyester industry, which is already reeling under thin margins”. He pointed out that the downstream units in the textile industry would also be impacted because they would not be protected by similar countervailing import duties on fabrics or garments.

The duopolistic nature of the Indian PTA industry, coupled with the fact that demand in India is always greater than locally available supplies, makes Indian fibre and yarn makers dependent on imports. Industry associations have pointed out that the annual shortfall of PTA supplies is about 0.6 million tonnes, about 15 per cent of the Indian requirement of PTA. They have argued that the single biggest beneficiary of the additional anti-dumping duties will be Reliance. More importantly, the duties would also encourage other overseas producers, even those not hit by the fresh levies, to increase prices by taking advantage of the shortfall in supplies in the Indian market.

The PTA Users’ Association has argued that the DGAD’s conclusions are based on “erroneous” grounds. Specifically, it observed that the findings had not established a causal relationship between imports of PTA and “injury” to domestic producers of PTA. Incidentally, in anti-dumping parlance, “injury” to domestic producers is said to occur when an importer sells a product in the Indian market at a price lower than the one prevailing in his own domestic market. The association has pointed out that during the period under review by the DGAD (2010-11 and 2011-12), all the three key variables—domestic production, domestic sales and overall domestic demand—increased by a similar magnitude of about 6 per cent. The movement of these three variables in tandem did not indicate the possibility of “injury” to domestic PTA producers, it argued.

Referring to the contention of Reliance and MCPI that unfairly priced imports had hit their profitability, the association pointed out that their lower profitability was on account of factors that were extraneous to the question of dumping. In the case of Reliance, lower profitability was on account of investments to expand its PTA production capacity; in the case of Mitsubishi, these were related to technical problems at its plant in Haldia in West Bengal. In fact, Indo Rama has argued that the very fact that Reliance is in the process of adding capacities to the tune of 2.4 million tonnes per annum proves that it is running an extremely profitable business, not one that is “injured” by unfair imports.

Those challenging the imposition of anti-dumping duties on imports point to other anomalies as well. They question the very classification of MCPI as an “Indian” company, pointing to the fact that anti-dumping duties can only apply to cases where an Indian company has been hit by unfair below-cost imports. Mitsubishi Chemical Corporation, one of the largest producers of PTA in the world, holds a controlling stake in MCPI. Four other Japanese entities hold a 29 per cent stake in MCPI; thus, Japanese entities enjoy overwhelming control, to the extent of 95 per cent in the Indian entity. Incidentally, Mitsubishi Chemical Corporation also holds a controlling interest in Sam Nam Petrochemicals, a South Korean PTA producer.

It is significant that both the complainants raised no objections about imports from Malaysia, also an important source of PTA. Perhaps the Reliance Group’s acquisition of a Malaysian subsidiary of the British petroleum major BP (formerly British Petroleum) in 2012 for $230 million explains this. Indeed, the PTA Users’ Association said that Reliance exported raw materials used in PTA production to its Malaysian subsidiary and imported finished PTA from that country. The association said that Reliance imported about 19,000 tonnes of PTA from its newly acquired Malaysian subsidiary between December 2012 and July 2013. The association surmises that this probably explains why the two complainants did not attack imports from Malaysia.

No evidence of ‘injury’

Those opposing the levy of anti-dumping duties point to the fact that Indian PTA capacity increased by almost one-third during the DGAD’s period of investigation, a giveaway that producers suffered no injuries from unfair imports.

In 2012-13, the two main producers, Reliance and MCPI, accounted for almost 85 per cent of the Indian PTA output. In fact, during the period covered by the investigation, Reliance operated its plant at more than 100 per cent capacity (see table).

In fact, according to the DGAD’s own findings, Reliance operated its PTA plants at 102 per cent during 2012-13, compared to 99 per cent in 2010-11. During the period of investigations, MCPI’s troubled facility operated at 70 per cent, compared to 57 per cent during 2011-12.

Industry sources estimate that the demand for PTA in India is growing at per cent. Although cotton apparel exports attract more media attention, the fact that synthetic textiles account for almost one-fourth of India’s overall textile exports of $40 billion in 2013-14 has escaped notice.

While manufacturers of polyester yarn claim that capacity utilisation has dropped by six percentage points to 63 per cent between June and September 2014, polyester staple fibre units’ capacity utilisation has dropped from 92 per cent to 85 per cent during the same period.

The alacrity with which the government machinery has moved against imports, which are the only countervailing force to the duopoly that dominates the PTA business in India, raises several disturbing questions. But it is fundamentally incongruous because it flies in the face of the logic of liberalisation in which “protection” is a dirty word, especially because it blatantly protects the powerful few against the weaker many.