Pakistan’s textile sector finds resilience in sustainability
Despite significant jump in cotton arrivals, flood of export orders and government incentives, the textile sector is unlikely to optimally capitalise on this opportunity owing to the rising cost of production, unavailability of utilities and above all rising freight costs.
Both Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL) have communicated to the industries that the gas supply would remain minimal in the coming winters, while the freight rates have multiplied due to shortage of containers and vessels.
The recent arrival of 3.85 million cotton bales for the mill use casts positive overtures on cotton production outlook where the current production target is set at 8.5 to 9 million bales for FY22.
The commodity prices have started receding, down 4 per cent to currently hover around Rs14,393/maund but still at historically highest levels. Cotton prices have surged 49 per cent during the last one year where low cotton production of 5.3 million bales, compared with the historical average of 8 million bales, amid robust demand from spinners pushed up the prices.
Various fiscal incentives have been offered to the export-oriented textile sector to stimulate exports growth. To this end, import duties on various raw materials such as filament yarn were slashed in the Federal Budget for 2021/22, which bodes well for the value-added textile sector.
The textile sector is also the recipient of cheap financing facilities by the State Bank of Pakistan (SBP) under the Exchange-Traded Fund (ETF) and the Long-Term Financing Facility (LTFF) schemes where the borrowing rates have been set at 3 per cent and 5 per cent, respectively. Financing under these facilities can be utilised to increase the production capacity, as well as managing working capital requirements.
Further, the turnover tax has also been reduced to 1.25 per cent of sales from 1.5 per cent of sales and is expected to be reduced further in the next federal budget.
“Cotton arrivals went up 100 per cent to 3.8 million bales. This could not only help Pakistan achieve more than 5 per cent GDP growth but would also increase our exports significantly,” the All Pakistan Textile Mills Association (Aptma) said in a tweet.
Abdul Rahim Nasir, chairman of Aptma, said that the cotton yam was sufficiently available in the county for consumption in the value-added sector for export purposes, “which is evident from the fact that [the] cotton yam export has declined in the past years, resultantly textiles have achieved historic high exports of $15.4 billion”.
The international cotton prices remained strong throughout the first quarter of FY22, as these hover around $112/lb. with an increase of 10 per cent on a quarterly basis in the first quarter of FY22 and cumulative year-to-date increase of 32.6 per cent. However, as per the latest USDA report, the global production/mill use is projected at 119.6/124.1 million bales, around 7.2/4.5 million bales higher than in FY21.
The local yarn margins currently stand at Rs247.2/kg, or 64 per cent, compared with Rs176.2/kg or 60 per cent in FY21, due to the robust demand outlook for the textile products.
With the high textile demand likely to persist in FY22, amid return to normalcy phenomenon, the analysts expect the yarn margins to remain buoyant throughout FY22. Further, the local yarn manufacturers actively targeted Chinese and Bangladeshi markets for exports last year, which resulted in a shortfall of yarn in the local market, which had to be fulfilled through imports.
However, with the local yarn margins at record levels and prohibitive international freight costs, it is expected the trend to change this year and the majority of the local yarn demand to be met by local yarn manufacturers.
The exports of textile products stood at a whopping $1.47 billion this August with an increase of 46 per cent, compared with $1.01 billion exports in August 2020/21. With the onset of the current fiscal year, there seems to be a booming trend in textile exports, as July, the first month of the current fiscal year also witnessed a 15 per cent growth, amounting to $1.471 billion.
The average increase in the exports of textile products for the current fiscal year (July-August FY22) was recorded as 29 per cent to $2.949 billion, compared to the $2.289 billion exports in the corresponding period of the last financial year.
As far as the equity market is concerned, the textile sector performance has remained sluggish delivering a negative return of 1.8 per cent in the fiscal year so far, despite significant positive developments, supporting earnings outlook.
Baig Group of Companies chairman Mirza Ikhtyar Baig said orders were coming big time, and would keep coming. “[The] cost of production is increasing due to the depreciation of the rupee because the export is import-based and around 70 per cent inputs are imported.”
“[The] new textile orders are coming, but the biggest problem is the scarcity of empty containers and vessels.” He said freight from Karachi to Germany had surged to $7,000/container, while freight from Shanghai to the US was $16,000/container. “Despite these rates, China has booked 5,000 containers, causing a worldwide shortage of empty boxes and vessels.”
Pakistan Apparel Forum chairman Javed Bilwani said that the costs have increased significantly in the last couple of years, which not only trimmed their earnings, but also made it difficult to compete with the regional peers.
“[The] export-oriented industries can’t afford power and gas outages. Production cannot be stopped, so we have to make alternative arrangements, which requires additional cost and energy,” Bilwani added.
Bilwani, a leading garment exporter, said the textile sector exports were increasing as there were abundance of orders.
“A momentum has been built, and it is the high time that the government supports the textile sector through ensuring uninterrupted supply of utilities at affordable rates.”
The exporters were faced with certain other challenges such as shortage of export containers and unavailability of vessels. “These problems are manageable but rising fuel costs due to insufficient supplies quite adversely impact the business,” he said.
Mohsin Ali at AKD Securities said the textile sector performance at the equity market had remained sluggish in the current fiscal year so far, delivering a negative 1.8 per cent return, despite significant positive developments supporting the earnings outlook.
“Moving forward, analysts expect the earnings of textile companies to remain robust in the near-term with [the] rupee depreciation and higher off-takes, as [the] global economies started reaching the pre-Covid levels and could keep [the] sector in the limelight. Hence, we maintain our bullish stance on the sector where any dip in prices will provide an opportunity to take exposure in textiles.”
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