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The divided textile industry of Pakistan is making noise again; the value-added associations of the Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA) and Pakistan Apparel Forum (PAF) have issued statements demanding the removal of 10 percent regulatory duty (RD) on yarn imports. Evidently, domestic yarn prices have increased, and the PRGMEA seems to be blaming the spinners' lobby, All Pakistan Textile Mills Association (APTMA).

Some context to the whole situation - Indian yarn was being sold in Pakistan at extremely competitive rates. As a result, APTMA began lobbying for protection, which came in the form of a 10 percent RD on yarn imports as of November 2015. Now, APTMA is being blamed for the increased prices; as per the statement of the PRGMEA Chairman, yarn prices have spiked by some 25 percent over the past couple of months, due to the "cartelization of local manufacturers who are taking advantage of 10 percent additional regulatory duty on import of yarn."

APTMA increasing yarn prices is not something outside the imagination. Naturally, with the spinners having the market all to themselves, being allowed a margin of 10 percent to compete with imports, a price hike was to follow sooner or later.

However, far be it from this column to choose a side regarding this matter, the blame on the spinners appears to be a bit misplaced. Firstly, the effectiveness of the RD is up for debate, as the numbers indicate that yarn imports have actually increased since November! The data for volumetric imports is unavailable, but in dollar terms, yarn imports have surged over the past few months. Yes, SBP data factors in the RD into total imports, so part of the increase is due to that; nevertheless, even if we subtract the 10 percent, we see that the increase in yarn imports is still quite significant.

Other possible factors include an increase in international yarn prices, or a higher PKR-USD parity. However, had there been an up-tick in yarn prices, it would have shown in our exports. The rupee dropping to Rs104 in August 2015, on the other hand, seems to support the increase in yarn imports.

BR Research has explored this occurrence in the past (Read: "The menace of Indian yarn," published May 18, 2016). To recall, sources at APTMA told BR Research that the reason the 10 percent RD hadn't worked out was because the Indians had upped their game even more, matching the duty and selling at even lower prices. It was said that the total duty needs to be 20 percent (15 percent RD + 5 percent customs) in order for the spinners to stay protected.

Even the Chairman of Pakistan Knitwear Association, Shahzad Azam - who was in favour of the duty being withdrawn and said "APTMA's job is to blackmail" - agreed that the RD had failed and the Indian yarn imports were still coming in on the back of greater incentives and subsidies by the Indian government. He emphasised the INR60 billion packages for textiles, which includes several tax and production incentives. The package seeks to increase India's textile exports by $30 billion and make it the market leader in apparel exports within the next three years.

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But the real reason behind the higher yarn prices is quite simply higher cotton prices; there has been a surge in cotton prices over the past few months. Cotton analyst Naseem Usman told BR Research that the rate went from Rs5,800 in early June to over Rs6,800 as of right now. Moreover, international prices have also spiked over the past ten days, since the USDA released its pessimistic report on the global cotton outlook.

So, it appears that APTMA is in the clear, if only this time. However, there is a countervailing viewpoint. One of the reasons that the RD might have failed could be due to the failure of the cotton crop; speaking to BR Research, PRGMEA Secretary General said that the failed cotton crop resulted in manufacturers having to import yarn, despite the RD. He was still of the view that the increase in yarn prices of 25 percent is due to the APTMA having control over the domestic market.

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