CHINA'S Yizheng Chemical Fibre Co expects the rising cost of raw materials to slow down later this year as more production lines for purified terephthalic acid (PTA) are built in Asia. The cost of raw materials has been the main worry for the polyester maker, whose earnings jumped 64 per cent last year, helped by a strong demand for polyester due to a cotton shortage. 'Global prices of chemical materials move in tandem with rising demand,' said managing director Ren Chuanjun. 'But some experts predict that the demand will ease in the second half of this year when several PTA production lines are in operation in Asia.' Yizheng's PTA plant will be in operation by August, with annual production capacity of 250,000 tonnes. Mr Ren said raw material costs would not have as much impact on the company this year as they did last year, because they were unlikely to rise substantially. The price of PTA, an essental raw material for polyester, soared 67 per cent last year, while that of MEG, another core raw material, grew 19 per cent. Yizheng's average raw materials cost was up 56 per cent, while the average product price rose 43 per cent. However, Mr Ren said the absolute price rise of polyester products could fully offset the absolute increase in raw materials costs. But Mr Ren cast doubts on whether the product price would sustain last year's growth. The rise would depend on both market demand and pricing between cotton and polyester. 'China cannot increase its cotton supply substantially, which pushes up the cotton price to the high end and, in turn, helps polyester prices,' he said. Mr Ren said last year's earnings growth was bolstered by the full operation of production facilities, higher product price and lower financial charges. This year, Yizheng would pump another two billion yuan (about HK$1.81 billion) into the third phase of its expansion programme, which involved total investment of 3.3 billion yuan. The company already had borrowed 2.3 billion yuan for the project, comprising a US$150 million foreign exchange loan and a one billion yuan domestic loan. But it was still short of one billion yuan, to be financed by a proposed issue of an additional 400 million H shares, if approved by shareholders. Yizheng reported in its 1994 annual result a foreign exchange loss of 472.22 million yuan under the Chinese accounting standards, because of unification of the yuan in January last year. Only 132 million yuan were consolidated in the accounts with the remainder to be amortised over next four years. Analysts in Hong Kong in general were positive about the company's results. Many suggested they were ahead of expectations. For 1995 the task of coming up with forecasts is problematic. Forecasts vary significantly depending on assumptions relating to whether the planned placement goes ahead along with the cost of inputs compared to the price of outputs. Analysts are forecasting profit of between 9.5 per cent, at $1.07 billion, and 50 per cent, at $1.46 billion for this year. The massive differences assume, on the bear front, there is no placements and hence no savings in interest expense, and that the cost of raw materials rises 13-15 per cent and the price of output rises 18-20 per cent. On the bull side, the top forecast assumes similar rises in raw materials and prices of output to 1994, and that the placement goes ahead. The bulls predict margin will be reduced, but profit will rise because the business is so strongly price-driven.