Challenging Times for Pakistan Cotton and Textiles
Junaid Vaid outlines Pakistan's path to success.
March 16, 2009
Cotton has always been one of the main agriculture crops of Pakistan, but after the textile sector’s growth over the last few decades, it has gained the principal share of Pakistan’s exports and industrial growth. The contribution of these sectors to the overall economy and employment is immense, and the well being of these sectors is closely linked with the growth of Pakistan’s economy.
The textile sector of Pakistan, which was already reeling due to an unprecedented rise in production and raw material costs, is currently in dire straights. The extreme volatility in raw material prices and finished goods prices in such a short time, along with the sharp downturn in world textile demand, has posed serious challenges for Pakistani textile mills. Mills’ woes have been further worsened by their inability to pass on the significant increased costs in the first half of the year, and now they are facing pressure from their customers to reflect falls in raw cotton and man-made fiber prices. Pakistan’s major textile exports are directed to the U.S. and EU, but with recession in these markets, mills claim that textile demand from these regions has nosedived.
The sharp downturn in raw cotton prices provide an opportunity for textile mills to quickly benefit from the lower replacement costs. However, mills are unanimous in their complaints that they have not benefited from the current downturn. The inability of mills to profit relates to a number of factors, including the absence of downstream demand, cash flow issues, financial concerns and the abruptness of the price decline. Though far from commensurate, the fall in cotton yarn prices across the world appears to have eroded any potential upturn in spinners’ returns. In addition to that, mills also have complaints that defaults on their higher priced yarn and end product sales have pushed them into further instability.
An Effort to Export
Pakistan Textile exports have consistently remained the yardstick for assessing the growth of the local textile sector. Unlike other large textile producers such as China and India, Pakistan does not have such a sizeable domestic demand for textile products and exports contribute to major portions of textile sector earnings. Pakistan’s textile exports have shown very strong growth since the turn of the century and continued to show impressive year-on-year growth until the 2006/07 financial year. The negative growth of textile exports and the textile industry as a whole is leading to a lower cotton consumption estimate for the 2008/09 season, as partial closures and layoffs in the textile sector are also being witnessed.
Higher priced raw cotton contracts are proving to be a very difficult issue to settle for both local mills and international sellers of these contracts. Mills with sizeable quantities of these contracts complain that they would be taking huge losses on products being made from the higher priced cotton and that the current downturn in textile demand does not provide them the financial muscle to weather such huge losses. With local cotton production falling well short of local consumption during the last few years, Pakistan has become a sizeable import market for international merchants. During the 2007/08 season, Pakistan was the second largest importer of raw cotton. Projections show next season to be comparable.
In such a scenario, opportunities are there for entities which are able to survive the current storm in decent health. A swift recovery in global textile demand is unlikely, but if mills can bring themselves in position to benefit from reduced replacement costs and sustain the current downturn then they will be in excellent position to thrive once market conditions improve. Every downturn in the global marketplace has to reverse at some point in time; as it’s commonly stated, “A bearish market is best cured by a bearish market.”
Junaid Vaid is Director of A.E. Mohamedy & Company