The nearly 50 per cent decline in domestic cotton output in 2020 and a sharp rebound in its local and global prices have brought to the fore the hidden tussle between different segments of Pakistan’s textile value chain, underlining an urgent need for a policy balance for protecting the interests of all players — including small to medium-sized apparel manufacturers — to boost exports.

Pakistan’s cotton output during the current crop year fell to 5.64 million bales from 10.76m bales last year, the lowest in three decades. Imports of cotton continue to meet the country’s requirement of about 15m bales. The industry’s cotton imports have jumped to $1.03 billion during the nine-month period between July and March from last year’s $556.1m. The massive decline in cotton output has created serious problems for the textile industry.

After enjoying an unprecedented run during the first half of the current fiscal year, the value-added sector is anticipating a significant drop in the overseas shipments from the country in the last quarter to June and a ‘disastrous’ three months from July to September on aggravating yarn shortage.

Exporters of value-added textile products claim that they have been suffering losses because of almost a 40pc rise in the domestic cotton yarn prices, nearly 700pc increase in sea freight and 8pc appreciation in the value of the rupee against the dollar since January. Based on their claims, the Economic Coordination Committee (ECC) has recommended the cancellation of the 5pc customs duty on imported yarn until the end of June. The cabinet is likely to take a final decision on the ECCC recommendation this week.

After enjoying an unprecedented run, the value-added sector is anticipating a significant drop in overseas shipments due to an aggravating yarn shortage

The Ministry of Commerce has already withdrawn the 5pc regulatory duty on yarn imports in December to ease price pressures in the domestic market and facilitate imports by the value-added industry.

On the other hand, the All Pakistan Textile Mills Association (Aptma), the lobby group representing wealthy yarn producers, is opposing duty-free imports of yarn. The yarn makers are also blamed by the value-added sectors for rejection by the cabinet of an earlier ECC decision to allow yarn imports from India via land route — Wahga-Atari border.

The rising domestic yarn prices have led exporters like Faisalabad-based Pakistan Textile Exporters Association’s Khurram Mukhtar to accuse the yarn producers of having created artificial shortages in the market to rig profits at the cost of value-added exporters. “The country’s yarn consumption had increased by about 25pc owing to the growth in the value-added exports that made hoarders and speculators jump into the market. Yarn is being hoarded or sold off-the-books on cash to push its local prices. The unavailability of raw material for the value-added industry will prove disastrous for exports,” he told Dawn from Faisalabad by telephone.

Such claims have led Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA) to demand that the prime minister order a forensic audit of yarn producers to break the ‘cartel’ of yarn makers.

While welcoming the ECC decision to allow duty-free import of yarn (from any source other than India), PRGMEA leader Ijaz Khokhar said Pakistan needs to continue importing duty-free yarn as long as it does not become self-sufficient in cotton crop to break the cartel of yarn producers. If this relief is withdrawn after June amid a shortage of cotton, export growth will be affected severely, which should be avoided at all costs, he told this correspondent by telephone from Sialkot.

“This isn’t an ideal situation given the losses suffered by exporters in the wake of increasing sea freight and a sharp depreciation of the dollar against the rupee, yet it will help ease domestic yarn shortages and provide some cushion to the small- and medium-sized apparel exporters.” He said the value-added textile industry believed that the real solution to their raw material shortage lies in the resumption of the trade from India through the land route. “(Yarn) imports via sea would never substitute extremely low-cost yarn via land route particularly in the wake of exorbitant hike in the rates of shipping lines.”

Pakistan’s cotton output during the current crop year fell to 5.64m bales from 10.76m bales last year, the lowest in three decades

Naturally, Aptma has rebutted all allegations and its chairman Adil Bashir asked the government last week to keep from ‘distorting the policy of free-market mechanism from cotton to garment in the textile supply chain as it would be disastrous for the textile exports’. He said the free market mechanism ensures international prices to the entire supply chain and is the reason Pakistan has so far sustained the biggest cotton crop failure and is still on the path of export growth. He was hopeful that ‘higher cotton prices will encourage the farmers to grow more cotton and increase their output this year.

In a series of tweets, Aptma argued that a ‘certain lobby is trying to mislead the government with unsubstantial claims regarding the shortage of cotton yarn’. It claimed there was ample availability of yarn in the market, adding (the value-added industry) did not want to pay the international price. The industry has exported 292.2 million tonnes of yarn worth $721.2m in nine months to March this fiscal year, down from 336.2mt worth $819.8m last year.

“Buyers need to pay international, duty-free prices of products to procure locally or from abroad. The value-added sector is reluctant to pay international prices as their export contracts are fixed whereas global prices have increased and the appreciation of the rupee has minimised the possibilities of gaining profit in a low-margin business.”

It contended that the yarn producers had purchased 6m bales of local cotton at international prices and imported the balance from the US, Brazil and West Africa to maintain yarn production of 200,000 tonnes a month, which is twice the requirements of the value-added sector. “Yarn and cotton rates reflect international prices. As a consequence of dollar depreciation and decrease in the cotton prices, spinners also had to adjust pricing and accept the loss.”

According to an executive of a major garments and home textile manufacturer, the reduced cotton output had created difficulties for the entire chain. “This is a fact that yarn and fabric are not available in the market for the value-added industry, the claims of spinners apart. But it is also a fact that the yarn producers have paid a higher price for imported cotton because of the rising global prices, leading to a spike in the yarn rates that has pitted value-added industry against yarn producers,” he explained. He said the other factors like the increase in the sea freight charges and appreciation of the rupee against the dollar have eaten into the margins of exporters of the value-added textiles as their export contracts were fixed months ago when the dollar was rising, cotton yarn was cheaper and freight charges were low.

“The changes in these variables have brought to the fore the diverging interests of the different textile chain segments. Unless these internal conflicts are addressed through a policy that looks at the entire supply chain rather than incentivises one or two segments, the tussle between them is likely to increase going forward. The cotton output and pricing issue is also likely to aggravate when 1m new spindles being added by the spinners to expand their capacity become operational.”

Published in Dawn, The Business and Finance Weekly, April 19th, 2021