Recent reversal in cotton prices signals a healthy sign for Pakistani textile makers, as the commodity accounts for more than forty percent of their raw material and any decline in its prices not just increases their profit margins but also makes them more cost effective in international markets.
Cotton arrival is seen increasing to 12 million bales this year, a growth of 6 percent over FY09, after the government raised its support price by 2 percent to Rs 1,500 per 40-Kg in this years budget. To add icing on the cake, there have been light rains in some cotton-cultivating areas of Punjab and Sindh, causing a favourable impact on the crop.
While major impact of higher cotton production will be seen by the end of 2009, domestic cotton prices have already started to taper off to Rs 3,450 per maund - down 18 percent from its historic high in August 2008. In June alone, average cotton price dropped by 5 percent, in anticipation of bumper crop in the current season.
This bodes well for gross margins of the industry, which is likely to increase by 100 basis points. However, given that most textile value addition firms procure cotton in the last quarter of every year, full impact of cost effectiveness will start pouring in from first quarter CY10.
Then there is competitiveness factor, as higher discount between local and international cotton prices enables Pakistani textile makers to price their products more attractively abroad. Average differential between local and international cotton price hovered around 7 to 8 percent in the last two months but is seen expanding to about 10 - 12 percent for FY10 - equalling a discount of Rs 6,300 per maund.
Meanwhile, Pak rupees likely slide against the US dollar in the ongoing fiscal year also bodes well for textile producers. Already, the currency has depreciated 4 percent rupee in CY09 to date and there are expectations that it would remain weak in most part of the fiscal year FY10.
However, the picture is not very rosy. Chances are that the industry, which could have been a darling this year on the back of higher earning margins, will continue to suffer from acute power shortages - partially offsetting the potential gain. Pity textiles.
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