VALUE ADDITION

Home textile on the verge of collapse

KANWAL SALEEM, LAHORE
Aug 27 - Sep 02, 200

After the closure of over 200 spinning units across the country, the value addition of home textile sector is almost on the verge of collapse. While on the other hand, the income tax being charged on a presumptive basis due to which even loss making units, have to pay income tax @ 0.5% of their turnover as minimum tax is adding burden on the struggling textile industry.

Apart from this EOBI, SESSI, social security, stamp duties, cotton cess and a long line of other levies, 3% in total of the sales, irrespective of profit or loss, are basically a direct cost on the company. Mr. Faraz Alam Khan, Life Member of SAARC Chamber of Commerce and Industry and CEO of Alam Cotton Mills (pvt) Limited told PAGE that last year export target could not be achieved mainly due to high cost of doing business in the country. He called for reducing mark-up rate and strengthening professionalism.

He maintained that Chinese textile industry was the major contributor to China's big trade surplus. It saw a US$129.2 billion trade surplus last year, accounting for 71 percent of the nation's total. In the first quarter of 2007, the textile industry's trade surplus reached US$27.28 billion, accounting for nearly 60 percent of the total surplus. Nevertheless, our regional competitors China, India and Bangladesh have given massive subsidies to their industries like lower mark-up rates, rebates, export refinance. China even gives free land and housing colonies to the industries besides discounts on utilities for export based industries, he pointed out. In stark contrast to China, he said Pakistan's textile products have not grown as much as expected. ''I will reiterate that as yarn producer's close down the whole chain is being adversely effected making our export situation gradually worse'', he said.

He however, said that country's textile sector always had played a vital role in the profitable economy of the country. As today too, it accounts for more than 64% of the total exports, industrial employment of more than 40%, share in the GDP 11% and more than 45% of bank advances in the manufacturing sector of the textile industry.

Mr. Faraz stated that for the last two years our textile manufacturing industry, especially the spinning sector has been in deep crisis, due to the disproportionate increases in the costs of production. Gas prices have been increased by 38% during last two years from Rs 172 to Rs 238 per mmbtu. The electricity cost has gone up by 10% with constant load shedding; and due to the increase in fuel prices, transport cost has jumped by 100% besides inflationary impact on every other cost factor; the banks have raised the mark-up rate to 14%, an increase of 300%, he added.

He further said that manufacturing costs have increased 300% since 2004. An analysis of 18 loss making companies found that, had the finance costs stayed the same as the Year 2004, companies would have made reasonable profits, despite all of the increases in the rest of the costs of production. This single cost increase has been instrumental in the malaise that the spinning industry finds itself in. Financial cost as a ratio of sales was 2.5% in year 2004 and is 8% in year 2007. Selling prices have decreased (June 2007 average unit price per kg has decreased by 3.8% as compared to June 2006) whereas financial costs have increased 5.5% as a percentage of sales which is unbearable, he added.

Mr. Faraz further said that gas prices for captive power generation have been increased 53% from Rs 172 to Rs 268 per mmbtu since 2004. Against this, the cost of the gas for captive power generation in Bangladesh is approximately Rs 80 per mmbtu i.e. 1/3rd of our cost for their power.

About the Indian cotton, he said the crop production there having similar soil conditions and weather have increased up to 20% yearly for the last few years. Therefore not only are they able to feed their own industrial requirements but also have a surplus export as the quality too, of Indian cotton has been better produced. In comparison to them, our cotton crop size is unpredictable and a source of speculation. The actual crop size has reduced from over 14 million bales to 12.3 million bales this year. The cotton quality that our industry is getting is full of trash and contamination and the relevant authorities have totally failed to check it, he added.

According to All Pakistan Textiles Association (APTA), spokesman polyester staple fibre (PSF) that up to 50% of the raw material used is man made fibre across the world whereas, in Pakistan, this ratio is close to 23%. The primary reason being the protection given to the local polyester fibre makers and their caramelized pricing mechanism. The local fibre is close to 24% more expensive than Chinese FOB prices. There is 6.5% duty, 3.5% R&D, freight element, inland transportation etc all add up to a differential of close to 24% with our competitor in China. Such imbalance in cost makes our product worth enviable, he added.

He added that oil prices have led transportation charges for companies to increase by 100% since 2004. Freight on raw material, stores and spares as well as finished goods have more than doubled. Wage increases totaling 84% since last June (from Rs 2, 500 to present Rs 4, 600 and Punjab having announced Rs 4, 833 which makes the increase 93% since June 2006), he said.

He expressed concern over charging the income tax on a presumptive basis due to which even loss making companies, have to pay income tax at 0.5% of their turnover as minimum tax. Regarding crisis in Pakistan, the spokesman expressed satisfaction that parliamentarians, government functionaries and particularly ministry of textile were fully aware of the gravity of the situation but it was alarming that in spite of their best efforts no positive step has been taken to control the fast deteriorating situation.

The spokesman further said Pakistan's stellar growth charge has taken the textile spinning industry as its unfortunate victim. Banks are reaping the benefits of insanely high spreads, fertilizer companies enjoy feedstock gas rates as low as 36.77 PKR/MMCF and the textile sector excluding the spinning sector all have been provided a helping hand in the form of Research and Development (R&D) support or Long term finance-For the Export Oriented Projects (LTF-EOP). Sadly, spinning has been left behind as a forsaken child. The race against time for the spinning mills of Pakistan has already started and mills are closing down daily. In a few years, it will dawn on us as a nation that consumer led growth without an industrial base and export oriented growth strategy has got us nowhere, he added.

Moreover, All Pakistan Textile Association (APTA) in an emergent meeting chaired by Adil Mahmood expressed shock that prices of cotton started with Rs. 3200/- per maund and rocketed to Rs. 3500/- per maund whereas during the last year it was Rs. 2400 to 2800 respectively.

Chairman APTA Adil Mahmood suggested the members to immediately move to spin finers counts 30/1, 40/1 & 50/1 and requested every body not to buy cotton unless & until it is very necessary.

The costing of 20,000 spindle mills with cotton rate of Rs. 3200/- per maund gives a loss of Rs.200,000 daily. Members were requested to have patience uptill September 15 so that arrival of cotton and number of ginning factories increases production.

Members of APTA protested against attitude of the government for totally ignoring textile problems and instead have raised electricity by 10 paisa per unit.