There is a growing pressure on exports to start delivering soon, but in the past two months marking the beginning of FY20, exports have merely grown by 3 percent with the textile group growing by 2 percent—the growth concentrated in higher value added goods like garments. Cotton yarn exports that used to be 10 percent of all textile exports last year have receded to 9 percent. Cumulatively, July and August 2019 exports of yarn fell by 8 percent year on year.
In its quarterly report ending Mar-19, the SBP pointed out that the performance of the textile sector during FY19 did not reflect the concessions and incentive packages provided by the government. The rupee lost 25 percent of its value in FY19 against the US dollar, which did not translate to higher exports.
An industry source argues that the rupee depreciation raised the cost of cotton (which serves as a raw material to yarn production), which more than offset any currency exchange gain.
He added that international buyers were aware of the declining rupee value and bargained the contracts accordingly.
The lower per unit price of cotton yarn exports in FY19 may corroborate this. During FY19, export price of cotton yarn was $2,595 per metric ton as opposed to the corresponding period where it stood at $2,626 per metric ton—a decline of 1 percent. Industry sources claim that these falling prices made domestic markets more viable with demand coming from garment manufacturers. Yarn prices grew 21 percent year on year locally during the July-Mar-19 period.
A major yarn manufacturer Gadoon Textiles in its annual report while explaining a 19 percent drop in its exports during FY19 said: “In addition to the non-availability of export rebate for spinning segment this year, the trade war among world economies was another reason for declining export sales during this year which resulted in fewer orders from China to which Pakistan’s export of yarn is at a higher percentage”.
In the two months of FY20, PBS data releases show that the price per metric ton of cotton yarn exports has declined by 10 percent while volumetric yarn exports actually grew by 2 percent.
It seems the situation has not cleared. Pakistan exports more than 50 percent of its aggregate cotton yarn export to China. SBP cited the Chinese customs data in its report, stating a 17.2 percent drop in cotton and yarn imports by China in CY18.
According to the SBP report, “[China] imposed additional retaliatory tariffs on its top yarn supplier, the United States (in July 2018). To make up for the resultant shortfall, China started unloading the sizable stockpile of cotton it had built up over the years to its ginning industry.
At the same time, China diverted some of its import demand for higher count yarn to Brazil, Australia and India, which managed to increase their market shares, according to the USDA. However, due to a product mismatch, Pakistani exporters could not benefit from this shift in Chinese demand, as Pakistan’s ginning industry mostly produces low-count yarn, which is not widely used in apparel-making”.
For now, domestic players have been able to shift their focus to the local demand. However, this demand may not grow too much. Eventually, yarn manufacturers will have to grow their exports and get competitive. No rupee devaluation will tackle that colossal task.
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