Period |
Unis |
Spindles
(000) |
Rotors
(000) |
1989-90 |
266 |
5,271 |
72 |
1990-91 |
277 |
5,568 |
75 |
1991-92 |
307 |
6,216 |
81 |
1992-93 |
334 |
6,860 |
95 |
1993-94 |
471 |
8,419 |
138 |
1994-95 |
494 |
8,610 |
132 |
1995-96 |
503 |
8,7l7 |
143 |
The first point to investigate is why and how this
surplus is there? According to textile sector experts, this year spinners are caught at a
wrong foot. Although, there was no shortage of cotton last year, they imported over one
million cotton bales— that too at a very high price. As the estimates about 1999-2000
crop were finalized it appeared that production would be over 11 million bales, In the
mean time over one million cotton bales, not reported earlier, started pouring in and
prices plunged. There were reports that last year, at least, one million bales were not
reported. This was the reason for the import of around similar number of cotton bales.
According to textile sector, cotton consumption in the country is around 9 million bales
and supply, this year, exceeds 13 million bales. This clearly indicates a surplus of
around 4 million bales — if the estimates are correct.
With the arrival of cotton from new crop various pressure groups became
active. Like every year, it was said that there would be a bumper crop of over 11 million
cotton bales. Phutti (raw cotton) prices have come down to an alarming low level. It was
apprehended that if government did not intervene the prices could go down further. Nawaz
Sharif, in his last days, ordered procurement of cotton by the Trading Corporation of
Pakistan (TCP) and banks were also instructed to provide funds to the Corporation.
However, there was also pressure on the GoP that involvement of TCP would not yield any
substantial results and it should not be allowed to play any role in the cotton trade,
whatsoever.
CONSUMPTION OF RAW MATERIAL
Period Cotton
(tonnes)
1990 91 1,128,918
1991-92 1,257,399
1992-93 1,318,892
1993-94 1,511,610
1994-95 1,412,732
1995-96 1,509,955
1996-97 1,444,368
1997-98* 1,466,645
Traditionally, there are two pressure groups involved in cotton trade,
these are growers and spinners. While the growers demand the highest possible price, the
spinners are willing to pay the lowest possible prices of cotton. They also wish lower
prices to prevail throughout the year. At the time of release of initial estimate of
cotton crop size both the growers and the spinners have a common motive — an
exaggerated output figure.
It may look strange but it serves the basic motives of both the groups.
They want to create an impression that there is a surplus of cotton in the country. The
growers want to give this impression so that there should be no restriction on export of
cotton. The spinners also join their bogey to keep the cotton prices low during peak
procurement season. As the time passes by their objectives become opposite. Once the
government announces cotton policy and exports orders start coming in the spinners
suddenly change their stance and try to give an impression that there is a shortage of
cotton and there should be a ban on its export.
SUPPLY AND DISTRIBUTION OF COTTON
000 Bales of 375 lbs. or 170 kgs
Years |
Carry
Over
Stock |
Produc-
tion |
Imports |
Total |
Mill &
Non-
Mill
Consu
mption |
Export |
End
Season
Stock |
Total |
1991-92 |
1,188 |
12,822 |
25 |
14,035 |
8,466 |
2,547 |
3,022 |
14,035 |
1992-93 |
3,024 |
9,054 |
33 |
12,111 |
8,921 |
1,498 |
1,692 |
12,111 |
1993-94 |
1,692 |
8,041 |
627 |
10,360 |
9,276 |
325 |
759 |
10,360 |
1994-95 |
759 |
8,697 |
645 |
10,101 |
8,881 |
215 |
1,005 |
10,101 |
1995-96 |
1,005 |
10,595 |
200 |
11,800 |
9,113 |
1,808 |
879 |
11,800 |
1996-97e |
879 |
9,374 |
364 |
10,617 |
9,190 |
210 |
1,217 |
10,617 |
1997-98* |
1,217 |
9,152 |
200 |
10,569 |
9,100 |
450 |
1,019 |
10,569 |
This has been a regular feature every year. Even during
the last cotton season the initial estimate was about 10 million cotton bales which was
subsequently reduced to around 8 million bales. The spinners also succeeded in convincing
the government that cotton should be imported urgently and over one million bales were
imported. The result was that with the commencement of arrival of cotton from current crop
its prices plunged due to over supply. Even when spinners were shouting about the
shortfall, many cotton experts were saying that at least one million bales were not
accounted for. Spinners did not agree with this but the time proved that the apprehensions
were correct.
PRODUCTION OF CLOTH MILL: SECTOR
(000 Sq Mtr)
Period Total
1990-91 292,911
1991-92 307,933
1992-93 325,396
1993-94 314,914
1994 95 321,841
1995-96 326,981
1996-97 333,495
1997-98* 338,445
It is true that cotton crop is exposed to natural calamities but pest
and virus attacks are manageable problems. According to cotton experts the poor crop
estimation is the result of following unscientific methods. While the US is able to
estimate Pakistan's cotton output precisely, we in the country fall pray to the tactics of
various pressure groups. That is the reason despite being among the top five cotton
producing countries Pakistan has no corresponding share in the global trade of textiles
and clothing.
MARKET SHARE POSITION OF YARN
1996-97
Countries Quantity
HONG KONG 158,298
% of Total Export 31 .15
JAPAN 108,196
% of Total Export 21.29
SOUTH KOREA 46,521
% of Total Export 9.15
ASIAN COUNTRIES 43,767
% of Total Export 8.61
*E.C.M. 35,156
% of Total Export 6.92
DUBAI 18,639
% of Total Export 3.67
CHINA 19,820
% of Total Export 3.90
*U.S.A. 10,797
% of Total Export 2. 12
TURKEY 9,643
% of Total Export 1.90
CANADA 6,671
% of Total Export 1.31
SINGAPORE 5,858
% of Total Export 1.15
U.A.R. (EGYPT) 3,444
% of Total Export 0.68
INDONESIA 4,401
% of Total Export 0.87
PHILIPPINES 4,311
% of Total Export 0.85
BAH RAI N 2,952
% of Total Export 0.58
MALAYSIA 2,450
% of Total Export 0.48
OTHERS 27,264
% of Total Export 5.36
TOTAL EXPORT: 508,188
To the utmost disappointment, Pakistan which should be producing over
20 million bales from the area currently under cotton cultivation, is whenever able to
produce over 10 million bales it becomes a crisis. According to textile sector experts,
the real demand of cotton in the country is around 8 million bales, at the best.
Therefore, there is a need for proper crop size estimate and a clear cut cotton export
policy. It is suggested that Pakistan should also implement the policy being followed in
India. India announces the exportable quantity of cotton for each quarter and then sells
it through international bidding.
The level of poor documentation is the reason for the confusion
regarding demand and supply of cotton in Pakistan. Growers, ginners, spinners, weavers and
processors indulge in off the book transactions. At least 10 to 15 per cent sales are not
reported. It is said to be due to the tax structure but more due to the lust for more and
easy money. While such transactions cause loss of millions of rupees to national
exchequer, they also distort data about production and consumption of cotton in the
country.
According to textile sector experts more than 500 spinning mills are in
operation in the country. However, cotton consumption and yarn production data is
available about only half of the mills. Many of the mills were reportedly closed years ago
but are still in full operation. Similarly, weaving is almost entirely confined to
unorganized sector. This is substantiated by the data available from the All Pakistan
Textile Mills Association (APTMA).
Therefore, there is an urgent need to introduce satellite based cotton
estimation and collect data about consumption of cotton by the spinners. At present two
government functionaries, Textile Commissioner Office and Central Excise and Taxation
department gets regular yarn production reports. Therefore, calculation of cotton
consumption by the mills should not be a problem.
According to some sector experts, there is a need to make government
offices and trade associations real functional to facilitate formulation of market-based
policies. It will help in countering the impact of pressure groups. The country needs
proactive policies and their implementation in letter and spirit.
In order to increase exports, the basic principle should be to improve
the competitiveness of the local manufacturers. Following the policy of rebates and
incentives have proliferated inefficiency in the manufacturing sector in general and
textile industry in particular. The real reason for the loss of competitive advantage are:
low production, poor productivity, persistent narrow export base and export of raw
materials and intermediary products. The country has also been failing in taking the
advantage of huge quota ceilings as unit price realization has been going down constantly
.
Pakistan, at the best, is termed as single crop country. Its entire
economy and exports revolves around cotton. Therefore, it is necessary to ensure
availability of cotton at competitive prices. This is not an easy task as various pressure
groups are involved in cotton trade. Out of these two groups, cotton growers and spinners,
have always been powerful — one due to political connections and the other due to
ample supply of money.
EXPORT OF CLOTH
Period |
Quantity
000 Sq.Mtr. |
Value
000 US$ |
$/Sq.Mtr |
1990-91 |
1,056,534 |
675,853 |
0.64 |
1991 -92 |
1,196,120 |
819,440 |
0.69 |
1992-93 |
1,127,584 |
863,101 |
0.77 |
1993-94 |
1,046,793 |
820,583 |
0.78 |
1994-95 |
1,160,659 |
1,081,444 |
0.93 |
1995-96 |
1,323,086 |
1,275,855 |
0.96 |
1996-97 |
1,257,430 |
1,262,389 |
1.00 |
1997-98* |
1,254,018 |
1,234,330 |
0.98 |
According to some textile sector experts regulated trade
of cotton can ensure its smooth availability as well as stability in its prices. The
regulated trade of cotton is also a demand of spinners. At the same time spinners have to
learn to live with, preferably, a ban on export of yarn of less than 20 counts. These
counts generally have negative value addition or yield marginal profit. The economic
situation of the country demands highest value addition. Since the yarn manufacturers are
not willing to change their attitude voluntarily, it needs to be changed through
regulatory framework.
Textile industry mainly suffers due to poor capacity utilization and
higher cost of production. It is necessary to understand the problems faced by each
sub-sector and address them accordingly. Textile industry has the largest potential to
produce exportable surplus and to earn much desired foreign exchange. Therefore, the
efforts should be made to enhance production and to improve productivity and quality
standards to boost unit price realization.
The reason for the persistent crisis in the textile industry is an
absolute imbalance in spinning and weaving sectors. According to some sector experts,
textile industry in the country is mainly confined to spinning. It produces 1.5 million
tonnes of yarn annually. Out of this mills consume around 3 per cent and 64 per cent is
consumed by the ancillary sectors — weaving and knitting. At least 33 per cent has to
be exported to avoid yarn glut in the local market.
To a large extent the GoP policies are responsible for this imbalance
but the industry cannot be pardoned for continued production of coarse counts, misuse of
superior quality cotton for the production of coarse counts and hardly any upward
integration. Spinners were contended with large scale export of coarse counts of yarn to
Japan and never bothered to produce fine and super fine counts of yarn. While the sponsors
were given permissions indiscriminately for the establishment of spinning units no effort
was made to increase weaving, knitting and processing facilities in the country. One of
the problems was higher tariffs on weaving and processing machinery despite the fact that
most of the equipment was not manufactured locally.
This, on the one hand, resulted in glut of yarn and the country was
forced to export at least half of the cotton yarn produced. On the other hand, it kept the
country as an exporter of low quality, low price intermediate products — mainly yarn
and grey cloth. Establishment of spinning units was further encouraged by offering
industry and area specific tax incentives. Since 1985 the justification was based only on
tax exemption otherwise these units were not economically viable.
The bullish sentiments prevailing in the capital markets in early
nineties provided further impetus and a large number of public limited spinning units were
established. This resulted in phenomenal increase in the project cost. These units have
large capital base and borrowed huge amounts. According to some securities analysts equity
was mainly raised through kickback. The cost per spindle, for a large number of units
established in this period workout over US$ 110 whereas it should have been around US$ 65
inclusive of a modest amount for kickback.
The result is that most of these units are economically unviable. The
fixed costs are very high but the real problem is exorbitant financial cost. On top of
this, these mills suffer from two problems: low productivity and low quality. While the
cotton consumed by these mills is suitable for producing fine and super fine counts of
yarn these mills use it for producing coarse counts fetching lower price per kilogram of
cotton consumed. The second problem is that these mills, at least officially, use around
one and a half cotton bale in a year whereas they should be consuming over two bales per
spindle.
According to some sector experts this is gross misuse of manufacturing
facilities as well as cotton. The persistent production of coarse counts has been causing
two problems: glut of coarse counts and low unit price realization. The glut cause
cut-throat competition among the manufacturers and lower unit price realization affects
repayment ability of the mills. They also say that even if cotton is made available to
these mills at half the international prices, many of the local mills cannot compete in
the global market. Most of these units will continue to post marginal profit or loss
unless product mix is changed.
Conclusion
In the prevailing circumstances cotton offers opportunities to overcome
the balance of payments crisis provided the GoP takes effective measures to ensure its
availability at affordable price, protect the interest of growers and spinners and
introduce policies for rewarding the highest value addition.
In this regard the most important step is to announce and abide by
policy of free trade in cotton — no restrictions on import and export of cotton.
There should not be any restriction on export of cotton. It will facilitate export of
surplus short-staple cotton and import of long-staple cotton . It is necessary to allow
duty free import of long-staple cotton to facilitate production of fine and super fine
counts of cotton yarn.
To encourage higher value addition, the GoP should not extend the
export refinancing facility on cotton yarn of less than 30 counts. This facility will
expire on December 31, 1999. Though, APTMA is interested in continuation of the policy,
the country needs better return for each kilogram of cotton produced in the country.
According to some analysts it is economical to export raw cotton rather than exporting
cotton yarn of less than 20 counts. The value addition on course counts is negative or
marginal, at the best.
It is necessary to redefine the quota allocation policy. Presently the
basis of allocation is performance (previous year's export) whereas it should been higher
value addition. The exporters achieving the higher unit price realization should be given
preference over exporters of stock-lots fetching lower unit price. Allocation of quota to
exporters of low quality, low price items is improper and tantamount to lost
opportunities.
Pakistan is getting ready to attend the next meeting of World Trade
Organization. The GoP should join hands with other countries exporting textiles and
clothing to ensure speedy integration of textile trade under Agreement on Textiles and
Clothing. Though, the importing countries are making efforts to slow down the process of
integration and introducing other barriers, textile exporting countries have to fight
jointly against the slow process of integration. While the developing countries have been
forced to open up their markets the developed countries have not been reciprocated in the
desired manner.
It is a common complaint of exporters that payments of rebates takes
very long time. The GoP had a plan to introduce no duty no rebate policy for the export
oriented industries. Till such a policy is implemented the GoP should, at least, ensure
prompt payment. The delays cause liquidity problem for the exporters and force them to
borrow, unnecessarily, from the financial institutions. Large scale borrowing increases
their financial cost and is an impediment in achieving competitiveness.
The current cotton season is rather unusual. While a bumper crop of
over 11 million cotton bales is expected, spinners face liquidity problem due to
settlement of overdue loans also. However, it is suggested that instead of allowing TCP to
buy cotton, the GoP should extend soft-term loans to cotton exporters and spinners to
stabilize its prices. The loans to cotton exporters should be adjustable against export
proceeds and the loans to spinners should be repayable within nine months. These loans
should be extended through commercial banks under financing to the agriculture sector. As
such funds to TCP have to be arranged and will carry the interest of around 15 per cent
and cotton will be the collateral.
To ensure proper availability of cotton, all the spinners should submit
weekly cotton consumption figures. The compilation of report should be the joint
responsibility of APTMA and TCO. At present both these organizations compile such data on
monthly basis and preparation of weekly report should not pose any difficulty. It is in
the interest of spinners to consolidate the cotton figure to know the actual consumption
of cotton in the country and allow export of surplus cotton.
Bumper cotton crop offers an opportunity to boost GDP growth rate,
enhance exports and bridge the trade deficit. The local textile exporters should produce
what the foreign buyers demand and not the products they can produce with the least
efforts.
