Denim: under weather?

Few weeks ago, an infographic making rounds on social media announced that export of denim clothing from Pakistan to US were up by 140 percent in July 2021. The information revealed that Pakistan is the fifth largest denim clothing exporter to US by value. Exports are inching closer to China, whose exports have suffered in the aftermath Xinjiang cotton ban and trade war between the two giants. Is the denim garments exporting segment at the cusp of a long-awaited growth spurt?

That answer depends on the trade indicator being looked at. Statistics on denim clothing export are unavailable as HS Code classification clubs all ‘non-knitted’ articles of apparel under same line items. If readymade garments export is used as proxy, there may be little doubt that export has witnessed significant rise in value terms, hopping ahead by 20 percent in FY21. The growth only becomes more phenomenal when broken down into average unit prices, which rose by 54 percent year on year. Basic arithmetic then dictates that exponential increase in price can only come if quantity export is on a decline, which clocked in worse numbers than even the Covid year (FY20), in fact 23 percent lower!

And the situation becomes only mysterious in Q1-FY22, when global trade has virtually gone back to full throttle. Unit price have maintained their growth momentum, while quantity exported is well-below peak levels witnessed pre-pandemic (FY19). Why are readymade garment volumes still struggling? Is it mainly non-denim apparel that’s in a freefall since Covid, or is denim apparel also under attack? It is impossible to comment either way without knowing the composition of denim apparel within readymade garments segment.

A 2019 report by Pakistan Business Council places share of denim garments at 50 percent within readymade garments. While this does not help ascertain whether the denim or non-denim apparel is losing volume, it confirms the significant share of denim players in the exports, possibly contributing as much as 20 percent of total value-added textile exports earnings.

That number may appear oddly specific. Thankfully, another disclosure made through social media comes in handy. For the past three years, lists of Top 100 Exporters have been making rounds in policy space. A basic aggregation exercise of exporting firms purely concentrated in denim fabric (5209-4200) and/or denim apparel export shows that just 16 denim manufacturers within all-top 100 exporters account for nearly $2 billion earnings in exports (Figure 01). It is worth emphasizing that the number excludes far too many smaller denim exporters, and composite textile units exporting both denim and non-denim-based products (such as Interloop Limited).

Surprisingly, on aggregate basis, the top-16 denim players export sales has hardly shown improvement in recent years, growing by less than 3.5 percent (FY21 versus FY19, excluding Covid year). Of course, it is useful to remember that most denim firms are composite players – exporting both fabric and apparel. And denim fabric export volume witnessed a massive freefall of 137 percent (against FY19 peak), showing itself in stagnant toplines for firms on overall basis (Figure 02).

But if Pakistan is exporting so little denim fabric, logic dictates that more fabric is being retained back home for onwards value-addition. Except, more value-addition locally is not reflecting itself in an increase in readymade garment export growth (in volume). This then only leaves three possibilities:

One, Pakistanis are buying a lot more denimwear locally, resulting in more local sales. Except, it is hard to contemplate a scenario where over two-thirds of previously exported denim fabric is being turned into denim jeans and jackets being worn locally, at a time when economy is still reeling from Covid and inflationary pressures.

Two, denim apparel exports are indeed rising, but they have replaced non-denim apparel exports within readymade garments classification. Considering that PBC believes share of denim apparel in RMG stands at 50 percent, and; that overall RMG volume is on a decline. Therefore, for inexplicable reasons, Pakistan’s non-denim apparel exports have come to a naught! Take this theory also with a pinch of salt.

Or lastly, that denim apparel production is not rising because the loss in denim fabric export is not turning into more value-addition (neither for local sales nor for exports). That would mean that raw material previously consumed by denim fabric is being consumed by a different value-adding segment, such as bedwears, towels, and knitwear – all of which have witnessed a healthy rise in export quantity in FY21.

But why exactly would denim segment be lagging, when all other segments have staged a comeback. Denim exporters must explain why.