Islamabad Outlook

Cotton prices under selling pressure

Arrivals of seed-cotton equivalent of lint stand at 8.60 million bales (4.86% higher than last season) up to 31-12-2000, according to cotton statistics, recently released by Pakistan Cotton Ginners Association.

Local spinning mills purchased 6.538 million bales (10.65% higher than last season). Unsold stock stands at 1.743 million bales, almost same as last season. Recently filed reports indicate that the size of this season's cotton crop may even cross the 10 million bales mark on ex-gin basis. Last season, Pakistan harvested a crop of 9.725 million bales ex-gin.

Most of the cotton players agree that practically our last year's total crop was between 10.8 and 11.0 million bales, on ex-gin basis. Thus, about one million bales were not documented, to evade sales tax on lint cotton, cottonseed and oil cakes.

As sales tax on cottonseed and oilcake has been withdrawn this season, almost all cotton production has been documented. Apparently, cotton consumption by local spinning mills has increased this season, but practically it is not so. Last year, local spinning mills, besides consuming 9.4 million bales officially, also consumed unofficially about one million bales of cotton, which was not documented. However, our mills are likely to consume even more than 10.0 million bales during 2000-2001 cotton season. We have to produce a larger crop, of 12.0 to 13.0 million bales, in the coming seasons to meet the increasing demand of our local spinning mills and export requirements of about 2.0 million bales.

Our textile industry has also to revamp its future production plans to meet the challenge of free trade after 2004. Cotton and textiles would play even a larger role in the development of our economy. Quality control through implementation of Cotton Grading and Standardisation System and Value-Addition in textiles (more exports of yarn than raw cotton, more exports of cloth than yarn and more exports of garments than cloth) are the most important keys for boosting our economy in the coming years .

Local lint prices have come under selling pressure in sympathy with crash in export markets. After touching the level of Rs. 2,750 per maund of 37.324 kg ex-gin, lint prices have come down to Rs. 2,600 for best cotton. Bahawalpur, Upper Sindh and DG Khan area cotton equal to Type 1467 staple 1.1.16" is available at around Rs. 2,550 to Rs. 2,600. Local spinners, who were the only buyers, are reported to have adopted the policy of wait and see . Now, the cotton market is featured by the absence of buyers. Exporters, who have yet to cover their export commitments, are also watching market developments very minutely. They would grab the chance as and when found. Lint prices in Lower Sindh for lower grades are now quoted between Rs. 2,200 and Rs. 2,400. Ginners now appear reluctant to procure seed-cotton, even at the level of Rs. 1,000 per 40 kg as they are already maintaining long position in lint sales. Cotton market is in a whirl and unless it settles down the buyers would feel shy in making their presence. Yarn prices are also reported to be weak. However, the present cotton price situation in Pakistan appears favourable for export market.

Prices are going down and Pak rupee and US dollar exchange parity is in favour of dollar. On January 6, it was Rs. 58.83 a dollar for exports. On the basis of Rs. 2,500 per 37.324 kg ex-gin price for Afzal 1.1.16, export parity works out to 55.75 cents per pound FOB Karachi. However, low grades like Adnas and 1210 low mic may be available at around 50 to 52 cents FOB Karachi. Sellers of lint cotton would resist the fall in prices with full force as their seed-cotton purchases were at higher rates of Rs. 1,050 to Rs. 1,100 per 40 kg.

This season, average weight of a bale has been reportedly found lower by 7 to 10% as compared with that of last season. There may be two reasons for this viz. the lint prices were on increase and the ginners had to deliver cotton at rates higher than contracted prices, and to get more liquid funds from the bank against hypothecation/pledge of cotton bales.

Banks calculate the Drawing Power (DP) by taking 170 kg as average weight of a bale at base price with 15% to 25% discount margins. The quality aspect of cotton bales pledged with the banks is not taken into consideration. Valuation of cotton stocks is done on the base price of lint cotton and on average weight of 170 kg which is quite wrong. The banks at times suffer huge losses due to this wrong calculation of valuation. Sometimes, the banks compute cotton valuation on the basis of quality of cotton declared by the party. The valuation system has many loopholes which make it quite dangerous and risky for lenders. One banker said that efforts are being made for adopting a realistic valuation system, which would safeguard the interests of the banks.

New York cotton futures prices have tumbled down by breaking the barrier of 60 cents and March settled at 59.42, lowest value in last six months. The reasons advanced for such abnormal slash in NY futures values are viz. a) Reported claim of a larger crop of about 20.0 million bales by China, instead of an estimated crop of 17.5 million bales; b) Reduced exports and lesser local consumption in USA; c) Reports of poor performance of the economy of US (Annualised growth rate slowed down to 2.2% in last year's third quarter from the rate of 5.6% in the previous three months). The US new administration of Bush government plans to reduce tax cut to the extent of $ 1.3 trillion to help jump-start a slowing economy.

China factor has played havoc with the international prices. China has worked out very positive economic upheaval targets to effectively meet economic challenges of globalisation of trade after the year 2004. In China half of its exports are generated by the textile industry. As China is already on top of cotton production, around 20.0 million bales (480 lbs.) it plans to expand the production base of all textile goods specially garments and clothing and capture export markets of these value-added goods.

As such, China is likely to become a net importer of raw cotton in the coming seasons. Approximately 75% of China's trade surplus was generated by the textile industry in 1997. In 1998, China had 150,000 shuttleless looms which were almost doubled in 1998-99. It is set to capture 40% of the world textile trade in 2002-2003. By adopting the policy of "decrease volume and adjust structure". China has reduced 10.0 million spindles and relocated 1.2 million textile workers lay-off. With more than 50,000 textile mills operating, which account for an export value of $ 43.1 billion, China takes first place in terms of production capacity of garments, cotton, wool, silk and chemical fibres.

It produces 5.7 million tonnes cotton yarn and 6.07 million tonnes chemical fibres which are 30% and 20% respectively of world production. China imports 35% of chemical fibres and 50% of fabrics used in the manufacture of export garments. China's textile sector is predicted to achieve a 6.0% growth to take its total fibre consumption to 14.0 million tonnes by 2005 and its per capita fibre consumption from the present level of 6.0 kg to the world average of 8.0 kg. In 1997, China's exports were $ 43.1 billion, against its imports of $ 17.2 billion. In 1998, its export were reduced to $ 40.5 billion and imports to $ 14.4 billion. Of the total textile exports of $ 43.1 in 1997, the share of woven and knitted garments was $ 28.6 billion--66.35%. With its entry into WTO, China wants to play a dominant role in world trade.

- by S. A. Aziz Shah