Declining production and growing consumption increase prices
Aug 13 - 19, 2007
Although the cotton crop this year has been measured around 14 million bales sufficient for consumption of local textile industry, yet the rising international cotton prices due to shortfall in world cotton production and late arrival of fresh cotton locally has created a panic like situation in textile sector of Pakistan.
International cotton prices are depicting a soaring trend since mid-May 2007 on the back of lower world production and declining stock to mill usage ratio.
According to the latest estimates of the International Cotton Advisory Committee (ICAC), world cotton production for 2007/08 is expected at 115mn bales, almost 3% lower than 118mn bales during 2006/07.
The shortfall in world cotton production and slow arrival of fresh crop in the market has ignited a sort of unrest among the local textile mills as the APTMA has demanded for import of cotton especially from India.
On the other hand, world cotton consumption is projected to continue its growth pattern by depicting 2% increase at approx. 123million bales mainly due to rebound in the international cotton trade on the back of higher Chinese imports.
A consistent growth in the world consumption along with tepid production levels is resulting in declining ending stocks. The secretariat estimates 14% decline in the world ending stocks at 48mn bales.
ICAC's season-average Cotlook A Index has been witnessing successive increments during the last three months and according to the latest estimates it is projected to the level of 71 cents/pound for the year 2007/08 as compared to 59 cents/pound in the year 2006/07, an increase of 20%.
The supply demand situation is developing more tightening in the wake of lower world production and higher consumption which is eventually resulting in a declining stock to mill usage ratio.
At the home front, the domestic cotton prices are also witnessing a firming trend and have reached to the level of PRs3, 100/maund (Ex-Gin price). The major factor behind this record price level is the lower arrivals in the domestic market.
Usually, the production from Sindh is considered to be the initial arrivals in the market.
However, due to floods in the cotton-sowing belt of Sindh, the supply is lower than expectations. In addition to this, higher international prices also fueling the domestic price momentum. The major textile players start cotton procurements during the period of Oct-December, the peek period for the cotton arrival. In our opinion, with the start of Punjab's cotton arrivals in late August and onwards, the prices are expected to ease down to the level of PRs2900/maund.
APTMA REACTION OVER COTTON PRICES
An urgent meeting of members of APTMA was held simultaneously at Karachi, Lahore and Peshawar over Video Conferencing System, which was largely attended by the members of APTMA.
The meeting reviewed the cotton and textile industry situation in the wake of unprecedented rise of cotton prices touching Rs.3500/- per maund on 9th August 2007.
There was a consensus in the house that based on surveys conducted; the cotton crop would be in excess of 14 million bales this year. However, due to delayed arrival of new crop there is a temporary shortage at the moment. The house approved the following action plan:
1. Mills short of cotton will close facilities on the 14th August 2007 being festival holiday.
2. Mills to consider temporary lay off for 14 days as allowed under the law.
3. Mills having cotton in excess of their immediate consumption would sell cotton to the needy mills.
4. A facilitation cell is established within APTMA to import raw cotton warehoused in the Middle Eastern transit ports. This cotton can be received in Pakistan within 8 to 10 days and is currently priced at approximately Rs.3,000/- per maund equivalent to Pakistan cotton.
5. APTMA to make a representation to Government of Pakistan to immediately allow unrestricted import of all types of cotton from India by train from, all ports of entry into Pakistan.
SBP SUPPORTS TEXTILE EXPORTERS
The Governor, State Bank of Pakistan (SBP) addressed APTMA members from Lahore to an audience connected through Videoconference in Karachi and Peshawar as well. She explained the salient features of the new monetary policy.
The adjustments of export refinance scheme are purely between the Central Bank and the Commercial Banks and would have no impact on industry. She assured that an understanding had been reached with the Commercial Banks that the limits utilized under Refinance last year would not be reduced for individual customers and that the rate of refinance is capped at 7.5%.
She informed that the LTF Scheme had expired on 30th June 2007 and that a new LTFF Scheme is under preparation, which would be implemented by 1st September 2007 after consultation with Industry. Members expressed concern about Letter of Credits established for eligible machinery under the old LTF scheme for which disbursement is expected in July & August 2007, is now being omitted. The Governor assured the members that she would look into it.
A presentation on Long Term Borrowings in Foreign Currency was also presented to the Members. The Governor encouraged the Members to explore the possibilities of obtaining Long Term Loans in Foreign Currency and offered to provide education on hedging against exchange rate fluctuations.
Regarding the 3 percent subsidy on spinning, as announced in the Federal Budget 2007-2008, she clarified that the Draft Circular has been presented to the Ministry of Finance and enabling instructions are awaited from the said Ministry for issuance of the circular.