Potential in Pakistan
A couple of EAP delegates recently visited Karachi in the Sindh province of Pakistan, as it’s presence in this consumer market continues to grow. It was great to visit existing clients as well as meet a few new faces. Many thanks to all of those who hosted us, and as always the hospitality was excellent. Plans for a return trip are already being discussed as well as a trip up north to the Punjab region.
Whilst there seemed to be a fairly optimistic attitude towards the textile industry potential in Pakistan, the overriding message received was that of political headwinds. ICE futures price risk, which is usually top of the agenda, now felt insignificant for some mills.
Lack of USD liquidity in the country is not fresh news and it is affecting all importers, not just those involved in textiles. The country’s ministers are currently in negotiations with the IMF over a proposed deal to replenish Dollar reserves, but strict conditions imposed by the IMF are highly punitive for a number of industries including cotton. Eg. removal of energy subsidies/caps for manufacturers and increasing interest rates by 3% with immediate effect taking their central bank rate to 20%. This means commercial borrowing rates are even higher. Competitors in Bangladesh and India are able to produce yarn at far more competitive rates at the current time and therefore the local yarn market offers Pakistani spinning mills a better margin.
At the time of visiting last week, there were allegedly just enough Dollar reserves to cover roughly 10-14 days of Pakistan’s overall import requirements. This does not include USD inflows from exports and therefore the liquidity will last a little longer, but this is a worrying fact. Again, there’s another kick in the teeth for many cotton importers as priority for Letters of Credit is given to food, energy and other necessities. Exporters bringing in USD are also given favourable treatment, but the favour is limited to a percentage of their inflows. Weight gains are nearly impossible to be paid right now as they are way down on the list of priority. To resolve this, mills are now proposing offsetting their debit notes against future business.
Discussions with a number of mills also revealed there is a lot of cotton at Karachi Port which is facing large demurrage and detention charges. As usual the shipping lines are showing little empathy. Buyers are unable to clear cargo because funds have not been released by the banks, even with a confirmed LC in some cases, and this is putting pressure on current confidence to commit to new purchases, even though ICE in the low 80’s makes it financially viable for Pakistani mills to buy in raw cotton and make a margin.
Local cotton offers are few and far between now as most of old crop is sold, with a general consensus among those that we spoke to fairly confident that 4.5 mln bales will be the final production number. Since 2015, LDC have slowly taken a firm grasp within the domestic market. They are now buying large volumes of the Pakistani crop and storing the cotton in warehouse facilities as well as providing financing options for mills, which in the current climate has been very well received. This has changed the domestic market as now the crop is available for much longer periods throughout the year, in particular higher grades, which in the past were typically snapped up early on by the larger, better capitalised, mills. Now you can still see old crop being sold nearly 6 months after peak harvest in August/September.
Those with buying power are still on the look out for discounted lots from the import market as expectations are that local prices will remain elevated. Some denim fabric and garment manufacturers have also shown a pick up in enquiry as orders move from the earthquake affected mills in Turkey to those in Pakistan. There are then rumours that some larger fully integrated mills have taken advantage of importing cotton utilising their USD credit lines and then selling the imported cotton in to the local market in local currency, bypassing the incredibly difficult Letter of Credit process for non-exporters.
Outside of the typical import channels, large quantities of cotton from Afghanistan have been making their way to Pakistan mills this year due to favourable logistics and POA payment terms. Sudanese cotton has also been bought in volume for its similar characteristics to local cotton.
At present, yarn stocks in Pakistan remain at high levels as they struggle to compete in the export market. Very roughly, on average mills may have 2 months of yarn stocks. Some mills have more and others less. Back during the covid recovery period, Pakistan like most other countries in the world made access to liquidity very easy. One of the initiatives was TERF (Temporary Economic Refinance Facility) loans, which were essentially long terms loans locked in at rock bottom interest rates. Many in the textile industry took advantage of these loans allowing them to rapidly expand and invest in new technology, machinery and mill infrastructure. The added spindle capacity means that many mills have been running at 50-60% consumption capacity for as long as 5-6 months. Raw cotton coverage is estimated to be 1-2 months (3.5 if including cotton in transit) based on the 50-60% operating capacity.
Whilst difficult to get a fully clear picture of consumption, generally it is estimated to be between 8.5 - 9.5 million bales this season. The wide range is due to the number of moving parts and lack of transparency from mills. For some, a critical juncture is in play. Those with vertical integration are benefitting, as they have the ability to run near full capacity and are relying less on local yarn purchases.
Largely it is the political factors weighing on the Pakistan textile industry that prevent consumption picking up, but were things to change and capacity was to increase, we could see a pick up in imports during the April/May/June window before the harvest period for the domestic crop. On the ground reports suggest that the crop will start harvest slightly earlier this year too.
Looking to the new crop, no one was really prepared to commit to a firm estimate on the crop size. Agricultural practices are an issue for Pakistan, with a lack of good seed, fertilisers, and support from the government making it it primarily an accessibility issue. There is a degree of frustration from the textile industry who see the potential for much better farming practices and a return to the old 9-10 million bale crops of the early 2010’s, but they are not being heard by the government. Tentative estimates though place next years crop at circa 8 million bales, however low yields could quickly change this narrative and it is typical of this origin to start high and get significantly lower. Punjab region is typically the best growing area in the country due to the monsoon rains which provide irrigation, however a lot of cotton acres in the Punjab region may lose ground to Maize as farmers look to take advantage of the temporarily available imported seed. The feedback from this seed is positive, with strong yields and for any farmer perhaps sat on the fence, it is a good alternative to cotton. Sugarcane is the other main competing crop.
To summarise, we’d like to leave you with the thoughts of the chairman of a major textile association in Pakistan who we were fortunate enough to meet during our visit.
At present the fundamentals of cotton are not as bearish as Pakistan textiles. In order of importance, the main issues facing the industry are:
1. Energy Costs
2. Letters of Credit and Cargo Clearance
3. Financing Costs
4. USD/PKR currency rate
And if only the first two are addressed, the industry will do pretty well again.
So while times are hard at the moment, with no guarantee of when things will improve, Pakistan has the potential to be an even more significant player in the world cotton trade, so long as the government addresses the current political and foreign currency reserve issues.