UNEXPECTED DECLINE IN COTTON PRICES

Bearish trend may last for next two months

By AMANULLAH BASHAR
July 26 - Aug 01, 2004

Cotton, which has assumed a leading role in Pakistan's economy, currently has become a talking point due to unexpected worldwide decline in cotton prices which may consequently affect economics of the textile producers in the short term.

However, if the textile exporters maintain the unprecedented momentum of the last year, the textile exports may gain the benefit out of the current bearish trend in the cotton market, which according to Iqbal Omer, Chairman Karachi Cotton Association (KCA) may continue to persist for another two months.

The textile producers, it may be mentioned, besides purchasing from the local market had also imported cotton in view of growing consumption and growing demand for cotton yarn and fabric in the international market.

The unexpected fluctuation in the market both at home and abroad has brought a massive loss of about 15 cent per pound in April as the average price was 61 cent per pound as compared to the prevailing prices of $45 cents a pound in the New York market. The drastic fall in cotton prices has led to a bearish market in Pakistan, which according to experts may continue to persist in next 2-6 months. However, this bearish trend in the local market is a test for the business acumen of our traders who has the holding power. My take advantage by lifting cotton at a cheaper rate to get advantage in the later part of the year. It will be time when the market will certainly boom due to increase in demand of cotton by all the segments of the textile sector. The demand for cotton yarn, fabric as well as garments is continued to rise despite a decline in cotton prices. The price per unit in the export market was also encouraging. The current situation is certainly a crucial moment for the textile business, which may go either way; it is yet to be seen how the industry plays its business cards at home as well as abroad.

The current local prices of cotton were reported at Rs2500 which are being expected to record a further low up to the level of Rs2200 while the New York prices are also likely to dip from prevailing price of $48.68 to $45 expected by the local traders. In view of the uncertain situation, the mills were seen taking extra care while lifting cotton from the market due to fear of further decline.

Traditionally speaking the textile producers lift cotton at least three months in advance to meet their requirements. Hence those mills that had bought cotton at a higher price three months back are said to be facing a threat to their economics. These textile millers however were taken aback by the sudden change in the cotton prices which sharply declined as soon as the news appeared that the China and other cotton producing countries have a bumper cotton prices this year. According to market sources, the textile mills currently have at least three million bales in stocks, which were either bought from the local market or imported to meet the growing consumption due to rising demand in the international market.

Generally speaking, the purchase price three months back was around 60 cent per pound as against the prevailing prices around 43-45 cent per pound. Obviously, the local prices have also come down to the level of Rs2500 per maund as a sequel to the sharp decline in the international market.

It is said that due to fear of further decline in prices the miller were seen purchasing cotton only for three to four days consumption to avoid any further loss. The local prices are under pressure of the international market, which is currently flooded with over-production. Most of the cotton producing countries was facing surplus production, especially China and United States.

Cotton based textile products in fact plays a pivotal role in the overall exports from Pakistan. The contribution by the cotton textiles worth around $ 9 billion in the total exports of around $12.2 during 2003-04 speaks volumes of importance the cotton based exports meant for Pakistan's economy. This year too, the government has set a target of $13.7 billion. Obviously, the major part of this target has to be contributed by the cotton-based exports. That means that cotton is highly important element, which has to be looked after by the economic manager in all respects.

However, the profit and loss essentially is the part of the trade, yet in our society people generally look for compensation in one form or the other from the government. In case of a windfall profit they never like to share the joy neither with the consumers nor to the government exchequer.

The government on its parts has taken various measures to support cotton and textile industry. In this connection, the CBR has increased duty drawback on the export of wide range of polyester staple fibre based textile products including 100 percent polyester stable fibre yarn and polyester-viscose staple fibre blended yarn from July 1, 2004.

The textile sector had strongly opposed the drastic cut in the duty drawback rates of polyester staple fibre based textile products. The duty drawback will also be enhanced on the export of grey blended garments, wearing apparel and other made ups all blended with polyester fibre. The prompt action by the CBR acceding to the demands of the textile sector may have a good impact on the overall performance of this leading export sector in Pakistan's economy.