August 2020 was supposed to be the low point in Pakistan’s external trade scorecard. Heavy monsoon rains across the country disrupted supply chain, with the destruction in Karachi particularly affecting the port activity.
As a result, monthly figures for both goods imports and exports have recorded double digit decline. Yet, textile group imports stand out, which recorded nearly 40 percent rise on a year-on-year basis. Why? Raw cotton imports.
As per PBS Advance Releases, Pakistan recorded its highest ever raw cotton import bill for the month of August (on a seasonal basis) this year. In fact, raw cotton import volume during the month was 12.5 times higher than same month last year, and 3.5 times higher than average August imports over the last decade!
It appears that raw cotton imports are beginning to pick up right when they were expected to come to a pause. Domestic cotton harvest season is upon us, when importing spinners usually take a pause between August – October season to assess the quality and prices of domestic crop, before going full throttle on imports beginning second half of the calendar year. It also helps that the government imposes a seasonal 10 percent custom duty between July – December, which it appears has not been imposed so far this year citing delay in shipments due to the Covid induced lockdown.
But what is most interesting is the rise in raw cotton import on month on month basis, which grew by 30 percent since July 2020. Remember that the PBS reported figures reflect volumes reaching Pakistan throughout the full thirty days of the month, whereas news of cotton crop destruction in Sindh only began to trickle in during the last fortnight. Enough time for spinners to place import orders and for shipments to dock at Karachi port? Unlikely.
Readers will recall that cotton shortfall during the MY2020-21 season was long in the making. At 2.2 million hectares, Pakistan is set to record its lowest area under crop cultivation since at least 1983-84, led by a precipitous decline in growers’ interest in recent years. In Punjab alone, cotton has lost nearly 1 million hectares since 2012, as profits have dwindled due to stagnant yields.
Long before the Covid scare took over the country, various policy actions taken at the beginning of the calendar year had already put out sombre forecasts of domestic cotton output for the then upcoming season. Losses incurred by growers during past season; fears of looming locust attacks; reduction in seed germination rate requirement from 80 to 50 percent; and reduced sowing target meant cotton growers were all but certain to switch to other crops, as they surely did from the looks of provisional crop data from provincial reporting surveys.
Nevertheless, that the imports will go in fifth gear even before harvest has begun in earnest in Punjab is humbling, especially considering that the predictions of textile demand slowdown from Pakistan’s major exporting destinations in northern hemisphere had meant that the effects of poor domestic output will be cancelled out by weak demand from value-adding sectors.
But that does not appear to be the case. After crashing in mid-April when the global lockdown began, Cotlook “A” index had recovered by 10 percent by August 2020, closing the month at $1.54 per kg. The premium between international prices and average unit prices of Pakistan’s imports has also trimmed, indicating that unlike 1HCY20, the country is now importing raw cotton of all grades. Meanwhile, domestic cotton crop prices are also on a rise, growing by nearly 5 percent since fresh crop prices first began to be quoted in mid-July.
So far, the seasonal price increases are in line with historic trends, indicating that despite news of textile demand slowdown across the globe, cotton prices are holding firm. This is particularly interesting for the international market prices, since global cotton supply is said to be anticipating the largest supply glut - at the beginning of the marketing year – in at least past 5 years (this of course discounts MY2020, where the poor consumption due to Covid was unanticipated).
Either way, barring re-imposition of tariffs on cotton imports, it remains to be seen how the shortfall in Pakistan’s output will affect international prices going forward. Watch out this space for a recap of fallout on global cotton prices in the aftermath of 2011 floods later this week.