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Monthly report card of cotton imports is out, and the spinning sector seems to be faring remarkably well in controlling cost of imported raw material. But at a time when international cotton prices have climbed 21 percent over last year – and continue their rally above pre-pandemic levels – how long will prudent inventory management last?

All considered, average unit price of 8MFY21 cotton imports stood at $1.65 per kg, well above the international price range during the two peak lockdown quarters – March to August 2020 – when global prices hovered between $1.40 - $1.54 per kg. Interestingly, unit price of import during those six months hovered above monthly Cotlook A Index rates, a deviation from long term trend (average unit price of imports by Pakistan historically average below the Cotlook A index).

This implies two developments: one, that cotton imports landing during peak lockdown months were against contracts entered before the global pandemic hit, which had led to a sudden crash in global commodity prices by April 2020. Earlier, global cotton prices had been surging upwards, rising 12 percent between Aug-19 and Jan-20.

Two, few if any cotton import contracts were entered during peak covid quarter (Mar to Jun 2020), when global futures rates had fallen below spot. That average monthly import unit prices are now once again lower than Cotlook A Index masks that fact. Was an opportunity to lock in long term contracts missed?

Hindsight is always 20-20. Predicting a V-shaped recovery in global commodity prices after a precipitous crash may appear obvious in retrospect but locking long term contracts may not have sounded like a precious idea when cancellation of garment export contracts was the order of the day. That import unit price during Feb-21 is 21 percent lower than spot prices is still significant; and that the premium is widening, even more so.

But the trend may find it hard to persist. Since Sep-20, USDA has revised its forecast of full year FY21 import volume upwards by 37 percent, as market estimates of worst-ever cotton season in 50 years have increasingly been confirmed. Domestic mill consumption is also up by 3 percent, but is still 4 percent less than pre-pandemic forecast, making poor domestic crop performance the primary culprit for revised imports estimate.

Here it is important to emphasize that forecast of domestic mill consumption during FY21 has varied very little from long term average of 13.5 million bales of 170kg – excluding consumption during pandemic year FY20. So far, Pakistan has imported 3.1 million bales in 8MFY21, whereas both USDA and private sector (PCGA, APTMA, and KCA) estimate domestic seasonal output at 5.8 million bales. With opening stocks estimated at 0.7 million bales, does this mean Pakistan is slated to import 3.6 million more bales before FY21 closes in four months?

If correct, that’s 16 percent more cotton than already imported during 8MFY21, and may add anywhere between $900 - $ 1,200 million to commodity import bill. Of course, there is little reason for transnational shipments schedule to follow official fiscal calendars, and there is every reason for deliveries to fall anywhere between now and September (when next cotton harvest season shall begin in earnest). But that still leaves with two likely developments.

One, considering that the momentum of cotton import volume has been breaking in recent months, it is possible that spinners are operating on a wait-and-watch strategy for international prices to settle in a range before locking prices down. Forecast of next marketing season from major producing countries such as US, China, India, and Brazil begin to trickle in by April, and it is possible that an upwards revision in global crop output may calm down prices.

Two, with average monthly imports breaching 0.4 million bales during 8MFY21, Pakistan is well on its way to rake in highest ever cotton import bill. But if the import volume falls shy of 5 million bales – against 6.6 million bales revised forecast by USDA – the spinning industry may have some answering to do.

Since the consumption of 13.5 million bales by domestic milling segment is well-established and broadly accepted by both private sector and government surveyors, the USDA import forecast is based on basic arithmetic. If the 6.6 million bales never arrive, how exactly will the domestic demand be fulfilled?