Pakistan’s monthly cotton yarn production crashed to just 210,150 metric tons in October 2022, according to Large Scale Manufacturing data released over the weekend. This would be the lowest monthly production of cotton yarn since June 2010, were it not for the Covid quarter of Mar – May 2020, when spinning factories came to a halt two years ago. The snowball effect from the destruction of the cotton crop by monsoon floods in Aug-Sep seems to be finally showing up in the production figures of the downstream manufacturing value chain. Are Pakistan’s textile exports in for a severe beating?
Despite clear signs of raw material shortage in the local market, raw cotton imports by the spinning industry haven’t exactly picked up. As per PBS, raw cotton imports during 5M-FY23 were down 11 percent by volume compared to the same period last year. In fact, H1-FY23 cotton imports are estimated at just 1.8 million bales (of 170kg), which is the lowest since the prohibitive tariff on fiber import during domestic picking months was waived three years ago.
Although a standard explanation of foreign exchange rationing is offered regarding the lackluster momentum in cotton imports, the reality may not be as cut and dry. According to USDA data, less than a quarter of total sales (volume) committed by Pakistani exporters during the current marketing year have been realized as actual exports. Remarkably enough, nearly 90 percent of these sales contracts had been entered by September 2022, when the cotton price in the international market still hovered above 120 cents per lb. Since then, world cotton prices have crashed below 90 cents, with sustained downward pressure as a forecast of global consumption continues to be adjusted on the lower side. In fact, USDA itself has reduced its forecast by nearly 10 million bales (of 170kg) since the beginning of the current marketing year, indicating a significant surplus in world fiber supply.
Thus, the lull in cotton import delivery to Pakistan may be as much about renegotiation of earlier higher-priced contracts, as much as it may be about the rationing of dollars in the local interbank market. Given domestic cotton arrivals have stopped short of 4.5 million bales (lowest since 1983-84), USDA still projects Pakistan’s cotton imports during the 2022-23 marketing year at 6.4 million bales (of 170kg). That would take the local cotton supply back up to 13 million bales, which is the estimated annual consumption of the spinning industry.
BR Research cautiously disagrees. Pakistan has imported just 1.4 million bales during 5M-FY23, incurring an import bill of $0.7 billion, at an average unit price of $2.82 per kg. In order for spinners to import an additional 5 million bales in the remainder 7 months (Dec 2022 – June 2023), the industry will have to cough up an additional $1.7 billion, even if the average unit price clocks in at $2 per kg for the rest of the year. That would take the annual cotton import bill to $2.4 billion, the highest ever and higher by 33 percent over FY22.
Unlikely? It sure has happened before. After local cotton production fell to 5.6 million bales during FY21 after similar crop devastation in Sindh during monsoon 2020, Pakistan’s annual cotton imports breached 5 million bales mark for the first time. However, it was still peak Covid back then, with world cotton prices averaging below $1.75 per kg or 80 cents per lb for the full fiscal.
Industry dynamics have also changed slowly but surely since. Although raw material shortage is most certainly taking a toll on textile export receipts, the damage is concentrated in low to medium-value-adding segments. Just three years ago, share of low-to-medium value-adding segments in textile export earnings stood at 55 percent. As of 5M-FY23, this has dropped to just 39.5 percent.
This has been made possible by the phenomenal growth in export earnings in the high-value adding apparel segment (knitwear and RMG), where five-month earnings during the Jul-Nov period have grown from $2.5 billion to $3.6 billion, compared to the pre-Covid period.
That’s because low to medium value-adding exporting segments such as yarn, denim fabric, bedding, and towel are far more cotton intensive, compared to apparel which utilizes a significantly higher share of polyester and synthetic fiber. In addition, export orders, especially from the bedwear and towel segments may be slowing down from their peak post-Covid levels, when bedwear share had gained over garments. More recently, export volumes from the knitted and woven garments segments have continued to grow during the current marketing year as well, despite the shortfall in cotton availability.
Imported cotton demand is also in some part driven by the local high fashion and lawn industry. Although the share of cotton consumption for made-up garments sold to local consumers is unknown, the significant inflationary pressures in the local economy dictate that there should be some slowdown in demand on that side as well.
Given domestic local cotton production at its lowest in 38 years and still elevated global cotton prices (compared to the long-term average), Pakistan’s cotton import bill may very well be the highest ever during FY23. But chances of monthly imports clocking over seven hundred thousand bales (of 170kg) over the remainder of the fiscal year appear unlikely. But forecasts have been wrong before; fingers crossed!
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