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ANALYSIS:Textile quota phase-out
heats up cotton and textile markets
S A AZIZ SHAH
KARACHI: Latest cotton arrival figures
strongly indicate a record high cotton crop of 14.5 - 15.00
million local bales in the 2004-05 season after 13 years
since 1991-92, when a record high crop of 12.8 million bales
was harvested. During the last 13 years, the government and
the growers spared no efforts in applying all their
available resources and techniques for producing a bumper
crop at least equal to 12.8 million bales, but could not.
This record of high cotton crop is only God-gifted and
nothing else. If we handle it properly it is more than
enough for us. Up to January 1, 05, seed-cotton equivalent
to 13.123 million local bales has reportedly reached gins,
and of this the local mills have procured 9.35 million
bales, the Trading Corporation of Pakistan (TCP) 1.255
million bales, and exporters 0.394 million bales with unsold
stocks 2.148 million bales.
People have started thinking about next year's world
production estimates. It is understood that the cycle of
cotton-friendly weather may continue for another 3-4 seasons
boosting the average lint yield per unit of land.
This does not mean that cotton production in coming seasons
would also go on increasing. The strategy would be to keep
the global cotton production restricted to the level of 105
-107 million 480-lb bales down from this season's record
production estimates of 114 million bales by reducing the
cotton area proportionately.
Globally, cotton farmers lost money this season by producing
a record high crop of 114 million bales because this
season's average cotton prices may decrease by about 35
percent, while the production increased by only 21.5 percent
over last year.
In Pakistan, seed-cotton prices decreased by about 36
percent from season's average price of Rs 1,250 to Rs 800
per 40 kg ex-gin while production increased by 50 percent
from 10 million bales to 15 million bales over the last
year. Thus, our cotton growers gained on higher production
and lower production cost.
However, Pakistan should not produce less than 13 million
local bales in coming seasons so as to meet our domestic
cotton requirements.
Of course, government's action of helping the cotton growers
to get them due price of their seed-cotton was a right step,
but the policy had some serious defects.
Instead of fixing the rate of seed-cotton at Rs 925 per 40
kg ex-gin, once for whole of the season the rate should have
been related to international export price or local price
and should have been reviewed weekly.
There was a need for a strong second buyer at export-related
market price instead of buying cotton at unrealistic
procurement price of Rs 2,159 for a maund of lint cotton.
This would have helped local market stabilise at realistic
level and avoid mess in TCP's cotton procurement operations,
corruption and huge loss to national economy.
The growers could not get the government assured price of Rs
925 while the TCP procured cotton from ginners at a fixed
price of Rs 2,159 per maund ex-gin calculated on the
seed-cotton price of Rs 925 per 40 kg. The TCP was neither
ready to handle such a huge procurement operation nor has
abilities and capabilities to manage the affairs.
Changes in cotton procurement policies/procedure were made
very frequently. Resultantly, the ginners are facing great
difficulties in getting their payments. The TCP has been
quite reluctant in accepting deliveries, and it was working
on go-slow policy.
Although, the TCP prices offered huge profits of Rs 300 per
maund over market price, the TCP could not get better
quality cotton - reportedly some more than 25 percent cotton
below Grade-III has been accepted in some zones.
When the TCP is procuring cotton at average higher price of
Rs 300 per maund, it should have at least set its quality
parameters at a higher level to Grade-II or even to Grade-I
instead of Grade-III.
Reports of corruption are common. In a very high level
secretarial/ministerial meeting at Islamabad, it was decided
that the TCP should also procure higher grade cotton and pay
the due premium, but its notification was withheld, and it
could not be implemented. This goes against the interests of
the growers, and is against the promotion of better quality
cotton.
Arrangements for the safety and security of cotton stocks in
the TCP warehouses in respect of fire-fighting arrangements,
possible damage by rains, safety from other dangers are
reported to be well below required standards. In case of any
mishap of fire or rains, loss or damage may be quite heavy.
This is only the aspect of procurement and warehousing, but
when process of its disposal would start different
problems/difficulties would arise.
The Pakistan Cotton Ginners Association has awarded a
contract to a person/company for expediting the payments,
weighing and quality take matters with the TCP on behalf of
their ginners reportedly at the rate of Rs 10 per bale.
Although, the procurement contract between the ginners and
the TCP does not have any provision for such arrangement by
the PCGA. This is simply a private arrangement. If the TCP
buys 1.5 million bales, the said contractor would get Rs 150
million. Where would this money go? Who would share it?
These are the questions to be looked into by the agencies
concerned.
The ultimate result is that cotton growers could not get the
assured price of Rs 925 per maund of seed-cotton and the TCP
would apparently make market loss at average Rs 300 per
maund besides, possible operational losses.
So far, the TCP is understood to have taken delivery of some
1.3 million bales against their contracts of some 2.4
million bales. Against this, the TCP is reported to have
committed export sale of some 30,000 bales at average price
of US Cents 40.69/lb fob. Karachi.
In the last inter-ministerial meeting last week at
Islamabad, the decision has been taken not to issue any
fresh international tender for export and sale of cotton
till further decision. Perhaps this reflects the pressure of
the All Pakistan Textile Mills' Association and the hope of
improvement in lint prices in the international market.
As the quota system on export of textile goods phased out
from January 1, 2005, the cotton and yarn prices started
picking up in international market as well as in local
markets. The story of cotton prices going down to US Cents
35 level perhaps may not come true.
The lint prices in local market have appreciated by more
than 10 percent in a week's time, and are still have
potential for improvement in line with international prices.
On January 8, 2005, the last working day of the week, the
Spot price for Grade-III was improved to Rs 2,000 per maund
ex-gin, while better grade cotton was sold reportedly at Rs
2,100 per maund. The ginners would now hold up deliveries to
the TCP, and would prefer selling to the private sector.
The exporters are estimated to have committed sale of some
750,000 bales, and are expected to increase it to one
million bales.
Export inquiries from China, Bangladesh, Indonesia, Thailand
and other countries of the region are pouring in and the
exporters are obliging the buyers. In bulk buying, some
international merchants are involved. Even some exporters
are reported to have sold low grade cotton to India.
The recent increase in local lint prices has put the
short-position exporters in difficulty. Local spinners are
understood to have planned for increasing their cotton
inventories to meet their cotton requirements up to
November/December 2005. Local cotton prices would strictly
follow the international cotton and yarn prices.
If the TCP decides to hold the export sales for a couple of
months, it would have easy impact on local cotton prices. To
oblige all the cotton holders, the TCP should allocate its
cotton stocks to export sales and local sales at 60:40
ratio, but holding the stocks for a longer period may cause
country damage cotton as storage conditions are reported to
be below specific standards.
In the face of firm trend in cotton prices, ginners would
prefer to sell to local spinners or exporters instead of the
TCP, and its deliveries may not cross the level of 1.50
million bales by the end of the season.
Courtesy: Business Recorder
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