WORKING FOR GAIN OR IN VAIN?

Sincere efforts required to overcome the 'surplus crisis' or the country may face another shortfall of cotton next year

By SHABBIR H. KAZMI
Nov 29 - Dec 05, 1999

Pakistani spinners who were always complaining about shortage of cotton and its higher prices, seems to be incapable of taking the advantage of bumper cotton crop this year. The estimated surplus may exceed 4 million cotton bales when one takes into account the size of current crop, the carryover stock and the consumption of cotton in the country. Cotton glut has become a source of serious concern. It is feared that if no sincere effort is made to overcome the 'surplus crisis' the country may witness another shortfall of cotton next year.

Growth of cotton textile industry

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
m
ption

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.