Textile under threat as cotton turns to gold

With cotton prices averaging Rs 3450 per maund, share prices of an average textile composite company rose by 49 percent - outperforming the index by 18 percent in the first quarter of the current fiscal year. But the recent surge in domestic cotton prices beyond its last year high now raises serious concerns. The situation is even more disturbing because the price hike doesn seem to be arising from simple demand-supply dynamics.
After easing ground to Rs 3,550 per maund last month, the cotton bull is catching up with prices soaring to Rs 3750 by the end of previous week - topping last years peak of Rs 3650 per maund. With the bulk of demand created by textile makers for their winter production already met amid 30 percent increase in cotton arrivals, there is no reason why prices should rise that fast.
Reports suggest, the millers are up to hoarding and will continue to do so in distant future. Despite a bumper cotton crop this year, the local market is tracking the prices in global markets which is expected to hit Rs 4900 per maund (in PKR terms) by the end of December 2009 - leaving a room of 25 percent before local and international prices come at par.
The trouble is that this hoarding isn just squeezing the margins of textile manufacturers but also threatens to dilute the quality of cotton, owing to which per maund production of yarn falls. If these fears materialise, Pakistan textile businessmen might have to import the commodity and thus loose the benefit of having a surplus this year.
So, when the Ministry of Textile holds the emergency meeting with textile stakeholders this week, they have plenty of issues to deal with immediately and evolve a broader cotton strategy for the benefit of textile industry. After all, textile manufacturers are already suffering from high power tariffs and being the biggest foreign exchange earner, the industry deserves better attention.
And since they are meeting, why not discuss the potential man-made fibre, which can easily be used as a good alternate to cotton. At present, the usage of cotton to man-made fibre is 80:20 in Pakistan, which is way short of its global average (60:40) - partly because of higher fibre prices at home and partly because of lack of proper market. The ministry should consider structuring a proper market mechanism to ensure that Pakistani textile producers benefit from this low cost alternative which may come in handy if and when cotton production falls.