Value-added in a fix

Pakistans exports topped $13 billion in the first seven months of the current fiscal year. The more than 20 percent growth was, as expected, mainly led by the 25 percent rise in the countrys top dollar earning sector: textile.
Contrary to trends last year, the sale quantity of raw cotton and cotton yarn fell by 49 percent and 24 percent, respectively. This, despite the 94 and 75 percent hike in average price per ton of raw cotton and yarn, respectively, shows that certain quarters of the value-added sector had been crying wolf, as regards the so-called
ampant exports of cotton and yarn.
FBS data show that the rise in cotton and yarn prices in the international market helped offset the decline in quantity terms - resulting in 5 percent growth in raw cotton exports and nearly 36 percent growth in yarn.
An interesting observation, however, was that the per unit sales price of value-added products haven increased by as much. According to FBS data, price per unit of knitwear, bed ware and readymade garments increased by 7.9 percent, 19.8 and 10 percent respectively, whereas that of towels, in fact, declined by a modest 2.7 percent.
Three reasons provide the explanation. One, that the value-added sector keeps huge raw material inventories - often lasting six months - which in turn helps them iron out the volatility in prices.
Second, on a related note, since Pakistans textile exporters are essentially suppliers to big international brands, that lock in prices for the whole season, and therefore, the per unit export prices tend to increase with a lag.
Third, but perhaps the most alarming factor, is the industrys inherent constraint to pass on the prices.
"These are very interesting times for the global textile value-added industry, because given the limits of purchasing power parity of consumers, the producers cannot keep on passing the impact of soaring raw material prices. So eventually, we all have to take a hit on margins," a CFO of a leading textile maker told BR Research.
Amid fears that international cotton prices are going to move further north, after having topped $2 a pound in New York for the fist time ever last week, the months ahead don appear nice and easy for the value added makers.

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Textile export yoy changes (7MFY11)

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                           Quantity  Price/unit    $ value

                              sold

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Raw cotton                    -49%         94%          5%

Cotton yarn                   -24%         75%         36%

Cotton cloth                   18%         15%         35%

Knitwear                       15%          8%         25%

Bed wear                       -1%         20%         19%

Towels                         12%         -3%         11%

Readymade garments             17%         10%         29%

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Source: FBS