Updated October 11, 2003



The index fell by 1.2% WOW due primarily to perceptions regarding the country's law and order situation. The week started off well enough, with the news that the Privatization Commission (PC) would be holding meetings with potential buyers of PSO by October 10 to fix a bidding date. This coupled with the liquidity in the market from last week's T-Bill auction and the 17% growth in first quarter sales reported by the cement sector saw the market close up. However, from Tuesday on, the market began to fall due primarily to the country's law and order situation.




















Azam Tariq's assassination coupled with the consequential riots in Islamabad and fears of continued violence from his supporters plagued the market for the rest of the week. Added to this was the test launch of Pakistan's new medium-range nuclear capable missile, negative news flow with regards to PSO's privatization and the rise in PIB yields on the back of SBP's notification with regards to 15 and 20 year bonds ensured that the market continued on its downward course. Friday however saw a small recovery as positive newsflow over PSO's privatization changed the investor sentiment.


The following week looks very difficult to predict. The direction of the market will depend on two factors: 1) newsflow on PSO's privatization, and 2) the law and order situation. Riots or revenge attacks of any kind are likely to immediately affect the market negatively. With the Prime Minister back in Pakistan, political maneuvering may restart between the government and the MMA, the outcome of which will also be looked at with great interest by investors. Lastly, there are two major listings in the next three weeks that may attract market attention. The NBP issue is due next week with OGDCL at the end of the month, both of which have the potential to create interest in the market.


Confusion and speculation drove cotton prices to an all time high of over PkR3000 per maund this week. News of pest attacks created panic among buyers and they resorted to heavy buying, ignoring official claims that the official target of 10.55 mn bales will be met. The fact that prices on the New York Cotton Exchange touched five-year high during the week did not help matters either. While



prices are likely to come down as the season moves forward, this bull-run in the cotton market clearly indicates the lack of faith in Government's statistics. Cotton buyers are more willing to rely on rumors and speculation about cotton production rather than official claims, which accompany almost all news articles on the crop situation in the country. Given the importance of the textile sector in the economy, and the inherent difficulty faced by manufacturers in planning for the future due to the nature of the industry, the Government should take proper measures to improve confidence among cotton traders. While we expect that the larger manufacturers will be able to minimize damage to their profits due to their policy of buying cotton over a prolonged period, high local and international prices are likely to have a negative impact on margins throughout the industry in the immediate term. Almost two months after KASB first reviewed the cotton crop situation in the country, trading in the cotton market is being driven by the same key sentiment as before: confusion. The main difference is that while earlier there were talks of production reaching 11mn bales, some people are speculating now that this figure can be as low as 8mn bales. Rumors of extensive damage to cotton crop due to pest attacks, combined with the tactics of some ginners to hold back phutti stocks to improve their bargaining power, have pushed cotton prices to an all time high. Again, we believe that the actual situation will not be as extreme as is being currently speculated.

The past few weeks have witnessed various reports indicating the presence of "American Sundi", and more recently "Lashkar Sundi", in several regions of the country. Some fear that these attacks will destroy 20 to 30 percent of the crop, and hence the speculation of 8mn bales. This, along with very high prices in the international markets, has created a near panic like situation among cotton buyers. However, views presented by some brokers in the popular press, coupled with comments made by representatives of some leading textile manufacturers in interviews with the writer, indicate that the sentiment is irrationally negative at this point. In fact, some still believe that the Government's official target of 10.55 mn bales will be met, although we expect slightly lower levels. Furthermore, we expect the cotton prices to come down as the season moves forward. However, the average for the year will be significantly higher than previous years and is likely to be on the higher end of the PkR2,500-2,600 per maund range.

The key reason for the current fiasco, which has the potential to seriously damage some of the textile manufacturers, is the lack of confidence in the Government. Almost every news article that discusses the current crop situation mentions official claims that the crop situation is not as bad as it is being projected. However, market participants seem more ready to believe rumors rather than these sources. This is a blatant indication of the lack of reliability of official statistics. The relevant Government departments should take concrete steps to salvage their reputation since it is hard enough for textile manufacturers to plan for the future without the woes of dealing with dodgy guidelines.


High cotton prices certainly do not bode well for the sector. According to a recent article by Merrill Lynch, given the current scenario, the only solution for maintaining margins is to increase sales and raise prices, which is unlikely to happen. As we mentioned in our earlier note, investors interested in the sector should focus primarily on companies that buy cotton over a prolonged period and hence have a chance of minimizing damage from the high cost - though they too are unlikely to avoid it completely. Asjad Yahya (9221) 111-222-000 ext 332








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