THE COTTON TRADE

The TCP has a hard choice to export or to sell locally

By SHABBIR H. KAZMI
Jun 19 - 25, 2000

Mohsin Aziz, Chairman of All Pakistan Textile Mills Association (APTMA) has asked the GoP to instruct the Trading Corporation of Pakistan (TCP) to release its cotton stock to local spinners. He has expressed fear if such a step is not taken a large number of spinning units could be closed down. The textile industry in Pakistan, according to the Chairman, faces shortage of over 700,000 cotton bales in the current season.

According to the data available upto May 31, the number of cotton bales pressed was 9.742 million. Out of this local spinners lifted 8.758 million bales, TCP bought 521,750 bales and unsold stock was quoted at 223,754 bales. The TCP has reportedly sold about 300,000 bales to foreign buyers but actual shipment was around 100,000 bales.

While this is the official version, the sector experts have a different story to tell. They say that since the GoP has imposed sales tax on lint around one million bales are never accounted for. They suspect that even during this year about 1.5 million bales have remained off the books. They suggest that one should add this quantity to arrive at the total production of over 11 million bales in 1999-2000 season. Therefore, there may not be any need to import cotton even if TCP does not sell stock to local spinners.

Does such a statement really carries any weight? According to cotton trade experts this has been a regular feature and this year, during earlier part of season, cotton prices were more than attractive to accumulate stock. Spinning sector was too busy to convert cotton into yarn. This is evident from production and export of cotton based products during the current financial year.

At the same time one needs to explore how the spinners suddenly became cash rich — usually they are never tired of complaining about liquidity crunch. One may attribute surplus liquidity to ample cash generation as well as enhanced availability of funds under export refinance scheme. Enhanced cash availability was mainly due to lower prices of raw cotton and man-made fibre (PSF). While the input cost remained low there was increase in price of finished products, i.e. yarn, grey fabrics, etc.

If one can recollect, when the arrival from current crop started, cotton prices plunged due to crop estimation of around 11.5 million bales. As cotton prices had gone down substantially the TCP was inducted as second buyer. To save cotton growers from the loss due to steep fall in cotton price funds were also made available to the TCP. However, very shortly reports of shortfall in global cotton output hit the headlines and cotton prices started improving.

While most of the spinning mills were able to accumulate stocks above their requirement, some of the mills could not. However, such mills mostly fall under the category of inefficient and mismanaged units category. Some analysts say that even if cotton availability is high and prices are low such units cannot compete with the efficient units. This is due to their lack of desire to undertake BMR and diversify the product range. For ages such units have been producing coarse counts of yarn where value addition is negative or at the best marginal.

One such example is Ali Asghar Textile Mills. It has huge accumulated losses — exceeding Rs 360 million as on March 31, 2000 — and there are no prospects of revival. However, a point to be noted that even such a mill was able to post pre tax profit of over Rs 23 million in the first half of 1999-2000 as against a pre tax loss of over Rs 13 million for the corresponding period of last year.

The GoP has announced its strategy to achieve an export target of US$ 14 million — based on enhanced export of textiles and clothing through higher value addition. Therefore, the first step should be to contain volatility of cotton prices. Production of cotton cannot be estimated with precision due to existence of various pressure groups. They have a history of distorting cotton production and consumption figures. Therefore, there should be no import duty on long staple fibre cotton. At the same time spinners should not be allowed to import cheap cotton.

The history shows that bulk export of cotton based products, both yarn and fabrics, has flourished due to export refinance facility. Commerce minister has been saying that there will be no such facility available on lower counts of yarn and coarse fabrics. Commerce Minister's statement must be supported by withdrawal of this facility on upto 30 counts of yarn and coarse fabrics.

There is a suggestion for financial institutions. They must initiate liquidation proceedings against those textile mills which have no prospects for revival. If it is too much to ask for, they should ensure change in board of directors of such sick units. The sooner the decision is made the better it will be for both the textile industry and the financial institutions.