Last month, BR Research had highlighted that Pakistan’s cotton imports during the 2021-22 marketing season appear to be witnessing major correction, declining by 12 percent during 8MFY22 (over same period last year). This assessment has now found vindication in the latest world cotton outlook by USDA, which has revised down its forecast of Pakistan’s imported cotton demand by 6 percent. (For more, read “Cotton imports: major correction underway?” by BR Research, published on 24 March, 2022).
It seems that therelentless rise in cotton prices globally has put a dampener in demand for imports, as prices have now officially touched a 130-months high. But global cotton price spiral is finally calming. According to World Bank data, cotton was among the few major cash crops to not witness a significant price jump in March 2022, in the aftermath of Russian invasion of Ukraine the same month.The two warring countries are not major producers of cotton,while import of made-up textiles and apparel by Russia and Ukraine is valued at a measly $3.5 billion, against total world trade of $800 billion!
Therefore, cotton prices have remained relatively unaffected by the military conflict which sent prices of other crops such as wheat, corn, and edible oils (palm, canola, and soy bean etc) up by as much as 20 percent between Feb and Mar 2022. The trend is likely to persist in the near-term, especially as world demand forecast remains unchanged. World supply-demand gap seems to have been met at the moment, and may stay so until the next harvest season begins in major producing regions such as China, India, US, Brazil, and Australia during Jun – Sep quarter.
What does that mean for Pakistan’s import outlook? USDA forecast continues to insist that Pakistan may import an additional 3.6 million bales (of 170 kg) between Mar – June, even as it imported only 2.75 million bales in 8M between Jul – Jan. That’s not beyond the realm of possibility, but risks sending the already elevated prices of textile products into a frenzy.
Market watchers will notice that wholesale prices of cotton based products such as yarn and fabric underwent an upward spiral between October 2020 and 2021, led by a surge in global cotton prices during the same period. Yet, cotton prices have risen by an additional 37 percent since October 2021, even though yarn and fabric prices in the local market have remained relatively stable.
What gives? Since a significant share of domestic cotton arrivals are received by October end, it appears that the revision in local textile prices have already accounted for the first round of price surge in cotton prices between Aug – Oct 2021 (peak harvest months). The increase in cotton prices since then seem not to have affected the local lint buying as much, while the increase in international prices since then appears not to have been passed on by spinners.
Does that mean spinners are taking a hit on their margins? Consider that average unit price of cotton imports during 8MFY22 stood at $2.24 per kg, which is close to local buying rate in Oct end. Although unit price of imports had surged to $2.62 per kg by Feb, it is still lower than the prevailing prices in the international market. Meanwhile, import volumes have significantly dwindled, keeping the average cost of yarn production under control.
If cotton imports surge from hereon to make up for supply deficit, prices of textile intermediate will also have to witness undergo upward revision, in turn affecting price competitiveness of value-added exporters. And with cotton sowing season just right around the corner – and buoyed sentiment of local farmers due to crop’s improved performance and profitability in the outgoing season – spinners might just prefer to wait on the sidelines. The stagnation in local yarn and fabric output during Jul-Jan 2022 lends even more credence to this theory.
What that might mean for Pakistan’s overall textile output? Regular readers will recall BR Research’s consistent view that it isn’t growing [substantially] any time soon!
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