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On Wednesday, fortnightly domestic arrival report confirmed that production of even 6 million bales (of 170kg) of cotton shall be out of reach in the ongoing season. Later same evening, Pakistan Bureau of Statistics reported import of 1 million bales in 4MFY21, highest since FY08. The extent of shortfall suggests that import volume for the full fiscal may reach at par with domestic output, but final import tally will depend on a variable which remains mostly unknown.

The surge in import volume in recent months is driven as much by forecast of depressed domestic output as it was by spinners taking advantage of natural backwardation in international commodity markets, following imposition of global lockdown beginning March 2020. Between Mar-Aug, unit price of imported cotton averaged at a premium of 1.10 times to Cotlook ‘A’ Index, as buyers jumped at the opportunity to lock in future delivery contracts at lucrative rates.

Since then, unit prices of imports have once again converged with global spot prices, easing the growth momentum earlier seen in month-on-month import volume. The million-dollar question is whether demand for imported cotton has reached an inflection point beginning October 2020, or will be revisited by a growth spurt in coming months?

An easy explanation would be to appeal to the risk of second Covid wave subduing optimism for early recovery in apparel exports; and make a case for a wait-and-see proposition. Afterall, market intelligence suggests that big textile houses – flushed with liquidity thanks to monetary stimulus by SBP – have already hedged their risk by going long on imported cotton contracts between May – Sep. Outlook on arrival of domestic cotton supply cannot get any worse either for the remainder of the ginning season.

Moreover, global spot prices have slowed down in recent days following release of revised forecast of global consumption in 2020-21 by USDA. This indicates growing uncertainty viz. early demand recovery for textile value-adds - especially in traditional exporting destinations located in the northern hemisphere. Thus, prudence would demand that spinners not risk incurring carrying costs by piling up inventory and take a ‘loss in their profits’.

Except, there is a catch, and it is called domestic demand for clothing and home textiles. Recall that imposition of sales tax on domestic textile sales last year had faced the ire of textile lobbies, even as they insisted that domestic demand dwarfed in comparison to exports. A market sizing exercise by BR Research at the time had placed size of domestic textile sales at over Rs 1 trillion – nearly three-fifths of annual textile group exports. (For more, read: ‘Textile’s crocodile tears’ by BR Research, 24 June, 2019)

As conflicting sources place cotton consumption by domestic spinning industry between a wildly varying range of 12 – 16 million bales, it stands to reason where the excess cotton supply (if any) is being consumed, especially as domestic yarn output has stagnated in recent years. Add to this calls for abolishment of custom and regulatory duties on cotton yarn import by the made-up textile segment, despite contraction in textile export volume in the post-Covid world. (For more, read ‘What is Pakistan’s cotton demand?’ by BR Research, 12 Nov, 2020)

Faced with the second wave globally, a slowdown in textile exports will indeed be a dampener. Maybe some comfort can be taken in the fact that the resilience (or lack of it) of raw cotton import will finally help understand the demand-side dynamics of cotton, especially w.r.t consumption of textiles, domestically.