Textile exports after the elimination of quotas since January 2005 have posted a favourable picture, being up by 13 percent to $6.3 billion during Jan-Sep 2005.
This rising trend is expected to follow on the back of resulting higher export opportunities ensuing from greater market access amid US restrictive actions on Chinese textile products, coupled with the extensive capacity expansion and BMR activities by the local players.
Textile companies enjoyed FY05 as a year of strong profitability growth by virtue of sharp increase in gross margins following the 26 percent decline in cotton procurement cost, thanks to the bumper cotton crop (14.6 million bales). Apart from soft cotton prices, another boon for the textile sector during FY05 was the relatively firm price trend in yarn and fabrics. Against a 26 percent decline in cotton costs during FY05, yarn prices were 14 percent lower Y-o-Y (Jul-Jun 05).
The government had set an initial cotton output target of 15 million for FY06. This target has recently been revised downward to 12.5 million bales.
Cotton output has been forecast to be on lower side compared to last year's bumper crop due to crop damage caused by floods, rains and pest attack. On the other hand, being stimulated by the opportunities of WTO regime, textile units have invested heavily in expansion and BMR activities. Thus, cotton consumption continues to increase in response to strong export and domestic demand, said to a report of Jahangir Siddiqui Capital Markets.
According to the recent report of Pakistan Cotton Ginners Association (PCGA), cotton arrivals as of November 1, 2005 depicted 24.3 percent decline from 6.26 million bales of last year to 4.74 million bales. This was attributed to above normal winter and spring rains and floods that collectively increased surface and ground water. Unusual rains in September resulted in attacks of pest while floods in October slowed down the harvesting process.
The analysis of data showed that this year Punjab's contribution dropped from 77 percent to 70 percent. A total of 3.34 million bales arrived from Punjab, down by 45 percent from last year figure of 4.83 million bales. This is because of flooding in Punjab that has not only damaged but also delayed the crop arrival. In Sindh, the production till the beginning of November 2005 was recorded at 1.40 million bales versus 1.43 million bales of last year, showing a marginal decline of 2 percent.
With average cotton-to-fibre blending ratio of 81:19, cotton price is by far the most important earnings driver for the textile sector. Cotton costs make up for nearly 50-70 percent of the total manufacturing costs and its price has a major impact on textile sector margins. "In the wake of anticipated decline in this year's cotton production and strong demand, we believe that cotton prices will go up and estimate average mill procurement cotton costs would range between Rs 2,300 and Rs 2,500 per maund. The ensuing hike in raw material cost would squeeze margins of textile companies by about 100-200 bps in FY06."
Recently, European Commission has agreed to allow 20 percent concession in customs duty to Pakistan's textile products, effective from January 2006. However, higher interest rates will hit the sector's profitability in the sense that textile companies have borrowed huge loans to finance the ongoing expansions and BMR activities.
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