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Textile mills likely to face hit on profits
Farhan Sharif
KARACHI: High cotton prices in the domestic market could have a negative impact on the profitability of the textile sector units and industry officials foresee that unit with 15,000 spindles might they see their profits shrinking by Rs 30 million.Waqar Ahmed Monnoo, chairman All Pakistan Textile Mills Association (APTMA), told Daily Times high cotton prices would erode industry’s profitability.
“No exact percentage can be given, but high prices may cause profits to decline by over Rs 30 million for a textile unit with 15000 spindle capacity,” Mr Monnoo said.
“And since the majority of the sector consists of small and medium size units, the effect can be very disastrous,” he added.
The cotton prices have toughed all time high levels during the current season and prices have largely remained over Rs 3.000 since the start of the season.
Industry officials said that high prices have reduced margins for whole of the sector which would result in profit decline for the larger units while smaller and weak units could be thrown out of the business. A senior textile mill owner, who asked not to be named, said the current hike in the cotton prices was completely speculative.
He said when prices touched all-time highs it was attributed to the international market prices but when the trend was reversed at the international market, the local prices did not ease. He said local prices have declined only by Rs 100 whereas the prices went up by as many as Rs 400.
Likewise, cotton traders and brokers said the reason behind high cotton prices was more due to speculation and high demand rather than crop losses, which are not major.
They said the prices in the local market has moved up unusually compared with the international market firstly due to slow arrival of new bales and than speculative trading caused the prices to touch all-time highs.
“The prices moved up with the international market, but did not come back much with it,” said Naseem Usman, a cotton broker at Karachi Cotton Exchange. “Even when arrival increases last month, the prices have not fallen,” he added.
Historically the local market adjusts or determines the cotton prices with its own supply and demand conditions and use to ignore movements in international market prices.
But this season the prices in local market started on higher side and further appreciated following the international prices to touch the all time high level at Rs 3,600 per maund. But when the New York Cotton lost 6 cents in the last two days of early last month, the local prices taken only a dip of around Rs 300 to Rs 450 and slipped to around Rs 3,100 and remained there for a couple of days.
Prices once again went up and currently cotton is selling around Rs 3,400 per maund to Rs 3,450 per maund, depending on the quality. And market dealers expect prices to remain above Rs 3,200 per maund during the season.
On the other hand, the latest cotton arrival figures issued by Pakistan Cotton Ginners Association (PCGA) by the November 30, 2003, shown 2 percent decline in total arrival to 6,587,392 bales, compared to 6,717,523 bales arrived during the corresponding period last year.
It is expected to provide further spike in the prices and the raw cotton would become costlier for the mills, industry officials said.
“The effect will be in accordance with the consumption,” said Amin Nagarya, owner, Ngarya Textile Mill. “The higher the consumption of cotton, the higher the cost of production and therefore margins would be squeezed.”
He said so far no closure of any unit has been reported but if the situation prevails, it would certainly would adverse impact on the smaller units.
While the textile sector analyst supported the millers’ stand and said if the prices remains high the effect would be witnessed in the annual results of current financial year for the sector.
“It would definitely hurt their earnings, and it would be seen in next financial results,” said Khalid Iqbal Siddiqui, an analyst at Invest Capital & Securities, a local brokerage house.
“According to rough estimation it would increase the cost of production by 30 percent this year,” he added.
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