Quota to be allocated on 'first come first serve' basis: tug of war between spinners, value added sector to continue

The tug of war between spinners and value added sector is expected to continue as a cap on the exports will remain in place with allocation of quota to be made on 'first come first serve' basis. According to, sources in the ministry of textile industry and official documents, exclusively obtained by Business Recorder, China's infected cotton crop lead to a crisis in Pakistan when its importers moved to cover their supplies.
Pakistan is 4th largest producer of cotton and 3rd largest consumer of the commodity, but is placed 12th in terms of international trade. "Ministry of Textile should be watchful about the demand and supply of cotton yarn in the market. Keeping in view the production of cotton and capacity of spinners, yarn exports should be capped. Trade Development Authority of Pakistan (TDAP) should be involved from the very beginning and quota should be given on first come basis.
It will be helpful to yarn exports as well as value added industry to enter in export deals," the sources quoted Hamid Amir Farooqi, TDAP's consultant textile, as saying in a report regarding yarn crisis in the country. The yarn market works on the principle of demand and supply.
Almost 80 percent to 90 per cent yarn is bought on cash directly from spinning units, whereas only 10 percent to 20 percent is traded in the yarn market through agents; mostly on credit basis and in majority cases exporters buy on cash and fabric manufacturers buy on credit for local market. Moreover, the vertical export units produce yarn for itself and the surplus is either sold in local market or is exported.
There are two major players in yarn market: the agent who buys from the spinner on the demand of exporter/fabric manufacturer and gives it on credit, and the broker who mediates the deal between agent and the consumer on nominal charges. In a detailed report the textile consultant argued that yarn prices are basically determined by spinning mills and often sold under the brand name of spinning unit.
The main determinants for price fixing for the spinning unit are as follows: (i) price of cotton in local as well as international market; (ii) price of fiber in local as well as international market; (iii) demand and supply of yarn in the market, (iv) cost of doing business in the country; and (v) export trend.
Value added sector has been accusing spinners for this crisis, which is apparently over simplification of nature and the making of crisis. The current crisis carries major implications. The quantity of cotton yarn available in the domestic market is far below the usual ratio of industry production (around 70 per cent), creating severe shortage of up 30 per cent and resulting in the price hike of over 30 percent in the last three months. International cotton scenario experienced an upturn from July.
New York Cotton futures on June 1, 2009 stood at USC 57.79 per LB which increased by November 17 to USC 67.89 per LB (an increase of over 17 percent). Domestic prices also moved upwards in unison with international prices after a slight delay. Karachi Cotton Association quoted its monthly average spot rates as Rs 3446 per maund in August, Rs 3484 in September and Rs 3597 in October. Spot price of cotton was set at Rs 4200 per maund on November 17, 2009.
The size of the cotton crop for 2009/10 is expected to be slightly better with 12.1 million bales harvest as compared to 11.4 million of last year. Pakistan cotton Ginners Association reported 29 percent higher cotton arrivals over last year by November 15, 2009 mainly due to early harvest varieties.
Statistically, cotton crop size and availability is far better than last year but damage to cotton crop in China (the largest producer and consumer of the world) has lead to an escalation in cotton prices. A sudden increase in raw cotton prices caused a panic for the major world importer of cotton yarn, China.
Its importers moved fast to cover their supplies with continued buying spree from Pakistan and India. Their spinners look up to clearing up their piles of inventories of new crop season with renewed vigor. The value added sector failed to notice overseas buying spree until they had mopped up huge quantities. The value added sector of cotton woke up too late.
All the overseas buyers mopped up available lot with shipment plans till January 2010. Standard cotton yarn count of 20's witnessed a price rising from $370 per bale for October/ November deliveries to $430 per bale for December/ January deliveries. The value added sectors usually enter into longer sales contracts, spanning from two to six months or even longer whereas they buy the cotton yarn on ready prices.
Sufficient stocks and relatively subdued prices in the recent past have been supportive of this market practice. But slow response of domestic value added industry to cover up sufficient supplies at increased market prices landed them in the current cotton crisis where bulk of yarn has been shipped in recent months and more is committed for export in coming months. This has flared up their prices to new heights.
According to the analytical report, current situation is highly favourable for those spinners who could purchase and afford sufficient stock of raw cotton at the start of cotton harvest season. Dynamics of market forces and trend indicates that sudden rise of prices and scarcity of cotton yarn is not for the spinners alone.
Current imbalance of domestic supply and excessive exports is the result of changing international cotton scenario. Had the value added sectors acted proactively through timely buying commitments with local spinners at market prices, they might have avoided much of the damage.
The consultant is of the view that textile industry consultations with the help of ministry of textile will be helpful in finding some meaningful mechanism to make sufficient cotton yarn stock available for domestic consumers to fulfil their commitments without much loss. But it is equally important that value added sectors should be more responsive and alert to changing world market trends to protect their own business interests.
It has been recommended in the report that TDAP should call for facilitation meetings of all stakeholders on monthly basis to get a feedback and also to carry out proper plannings. "This mechanism will be helpful in giving feedback to the ministry of commerce and ministry of textile for policy adjustment. It will be a platform to redress the complaints of all aggrieved," he added.