Raw cotton imports: what’s going on?

Conflicting reports are coming in regarding the Feb-20 cotton import bill. While estimates of domestic seasonal output are in, it appears cotton import volume may not have increased correspondingly.

Although arrival of late cotton harvest in ginning factories historically continues into April, as per Karachi Cotton Association’s daily report, no increase in stocks was seen between 15-Feb and 01-March arrival position in ginneries. While the federal government is yet to announce its official figure in CCAC meeting scheduled for April, it appears total cotton production for the 2019-20 kharif season will clock in 8.56 million bales, worst in last 26 years.

According to Textile Commissioner’s Organization, annual bale consumption by domestic yarn mills has ranged between 14 to 16 million bales for the last 14 years. Going by the conservative number, spinning sector is looking at a shortfall of at least 5.5 million bales, but pickup in import appears stubbornly slow.

Highest shortfall during the last decade stood at 3.5 million bales during FY18; that year, cotton imports picked up pace early right from the beginning of ginning season. Cotton import during Oct-Dec 2017 stood 0.25 million bales, with additional import of 3.2 million bales in second half of that fiscal year.

If anything, demand for imported cotton should have only aggravated since. Yet, cotton import for first six months stood at just 0.29 million bales. Market intelligence at the time had suggested that distortive tariff of 5 percent custom duty and 5 percent sales tax applied for months of Jul-Dec may have kept spinners on the side lines during first half of the year. However, banking channels noted that import contracts had already been locked in for delivery beginning January; with the full impact of demand for imported cotton to reflect in the remainder 6 months of the fiscal calendar.

Yet, January came and went with a whimper. While it is correct that import picked up significantly in percentage terms on both month-on-month and yearly basis, volume imported of just 0.4 million bales appeared insignificant to address shortfall due to low domestic output.

Spinning giants insisted that because the tariff easing came into effect only in the second half of January, delivery faced delay. Considering the demand from yarn segment has been sticky for a decade and a half, that would mean average cotton import of 0.7 million bales between Feb-Jun 2020. Except, reports from cotton traders now indicate that Feb import also saw no serious upsurge.

That is worrisome. Although PBS advance releases are still awaited, cotton traders are of the view that Covid-19 has affected shipment timing, and Feb’s volume has carried over into March. While this may have no impact on annual import bill, delay in import of raw material is indicative of how the logistical risk can slowdown the value chain, with the effect to eventually trickle down into garment exports later.

But there is another view. Considering the slowdown in global trade witnessed over the past 18 months – exacerbated now only by fears of global pandemic – international cotton market is not exactly witnessing a resurgence. Even at $1.5 - $ 1.6 per kg, prices are a far cry from $2 peak last seen two years ago. The theory goes – why import cotton when yarn buying can be done at similarly lower rates?

Since PBS monthly import releases do not disclose figures for cotton yarn import, it is hard to say whether the theory holds weight. Either way, March trade numbers will make up for an interesting read. In case raw cotton import is facing a slow pickup without commensurate increase in yarn import, lower cotton availability will begin to hurt garment exports. And if garments export volume continues to surge regardless, the theorists must look for other explanations, such as whether a ‘synthetic fibre based exports’ revolution is underway?