Weekly Cotton Review: KCA decreases spot rate by Rs700, closes it at Rs 16,500/maund

KARACHI: Overall bearish trend prevails in cotton prices. After fluctuation bearish trend prevails in international cotton markets. The textile sector is in crisis. Textile sector is in financial crunch and is on the brink of closure. 345 billion rupees refund required.

State Bank of Pakistan has given a big blow to the industry by increasing interest rates. A positive strategy should be developed now for the revival of the next cotton crop. Arrangements should be made to provide active seeds, pesticides, fertilizers at cheap rates to the farmers. There should be no sugar mills in cotton areas. Cotton should be preferred instead of sugarcane. Government should consider the offer of taking technology from China and America to increase the cotton crop.

Overall bearish factor prevailed in the domestic cotton market during the last week. Textile and spinning mills are cautiously purchasing cotton due to strong demand for cotton yarn and due to decline in prices. Trading volume remained low. There is uncertainty among the ginners who had the stock of cotton. Many producers believe that they are not selling cotton in the hope of a further increase in the dollar price. It is expected to increase.

On the other hand, there is no business activity in the textile sector the purchase of cotton yarn and textile products are very low. Mills had the stock of cotton but they are cautiously buying because of the financial crunch.

In a statement, APTMA group leader Gohar Ijaz has demanded from the government that billions of rupees are not being paid of refund by FBR of the textile sector due to which the textile sector is suffering from severe financial crisis.

He said that currently about 60 Percent of the textile sector has been closed. If the situation continues like this, more mills will be closed due to which unemployment will increase further. Other sources of the textile sector say that if the situation does not improve, the textile sector and the spinners have imported cotton, it will be difficult for them to open L/C and even the partially functioning mills will have to be closed as a result of which current crisis will worsen.

SBP has given a major blow to businesses and industries by increasing interest rates.

After fluctuations in the international cotton markets over all bearish trend prevails in international markets. The rate of Future Trading of New York Cotton for the month of March is in between 79 American cents to 82 American cents per pound.

Meanwhile, the International Cotton Association (ICA) held a three-day meeting of textile mills and cotton agents around the world from November 8 to 10 in Las Vegas, USA. The USA Cotton Summit 2022 was a three-day summit held from November 16 to 18, in which textile mill owners and cotton agents from around the world participated. Due to recession, the textile sector is suffering from severe crisis. The textile sector is in a great turmoil.

The rate of cotton in Sindh is in between Rs 14,000 to Rs 17,000 per maund. The rate of Phutti is in between Rs 4,500 to Rs 8,000 per 40 kg. The rate of cotton in Punjab is in between Rs 14,500 to Rs 17,000 per maund while the rate of Phutti is in between Rs 6,000 to Rs 8,200 per 40 kg. The rate of cotton in Balochistan is in between Rs 15,000 to Rs 17,500 per maund while the rate of Phutti is in between 6,000 to Rs 8,500 per 40 kg.

The Spot Rate Committee of the Karachi Cotton Association (KCA) decreased the spot rate by Rs 700 per maund and closed it at Rs 16,500 per maund.

Chairman Karachi Cotton Brokers Forum Naseem Usman told that bearish trend prevails in international cotton markets after fluctuations. The rate of Future Trading of New York Cotton for the month of March is in between 79 American cents to 82 American cents.

According to USDA’s weekly export and sales report, 21,000 bales were sold for the year 2022-23. India was at the top by purchasing 7,500 bales. Indonesia was second by buying 2,600 bales. Turkey bought 11, 200 bales and was on third.

12,300 bales were sold for the year 2023-24. Turkey was at the top after buying 11,000 bales. Pakistan was second after buying 1,300 bales.

APTMA has asked PM Shehbaz Sharif to restore the zero-rating status for survival of the export industry, saying around 60 percent the textile industry had closed down on an extreme liquidity crunch, while the rest were on their way to closure, it warned.

Around Rs300 billion of the industry had remained with the Federal Board of Revenue (FBR) as a result of the collection and refund mechanism, it said. In a letter on Monday, All Pakistan Textile Mills Association (APTMA) patron-in-chief Gohar Ejaz drew attention of the prime minister to the liquidity crisis that was resulting in a massive loss of exports and an increase in unemployment. “The liquidity crisis has occurred due to demand destruction at the onset of a recession in export destinations, abandonment of the FASTER system commitment to pay refunds within 72 hours, and foreign buyers extending their payment period against shipments, the letter with a subject ‘textile sector is shutting down’ read.

The currency depreciation of 60 percent with the last year with no corresponding increase in working capital facilities and accumulation of deferred sales tax not refunded for the last 3 years also contributed in the crisis, it added.

APTMA argued for restoration of SRO 1125 zero rating saying that in FY22, the total amount retained by the FBR as sales tax on domestic sales was only Rs50 billion, out of the Rs249 billion collected.

Approximately, a huge amount of Rs300 billion of the industry had remained with the FBR at all times as a result of the collection and refund mechanism, as the production chain takes between 6 to 9 months before final export and refund claim, the association said.

“Sales tax is consumption based, which inflates inventory and capital costs, serving as an impediment to new projects and increase in business as capital and operating cost increase by 20 percent and refund can only happen after commercial operations.”

The letter pointed at an IMF report that says the cascading effect of GST had harmed Pakistani exporters’ competitiveness as there was currently no systemic method to ensure that all tax paid on inputs might be charged against a final sale was fully refunded.

“The imposition of sales tax has resulted in billions (over Rs300 billion) of rupees of liquidity transferring from the industry to the FBR.” Rather than encouraging import substitution, the sales tax regime did opposite by dis-incentivising local production and promoting cheap imports, APTMA lamented.

“When a company holding a DTRE, Bond or EOU license needs to buy raw materials like cotton, yarn or greige fabric, if it imports them through these schemes, it does not have to pay sales tax or duties, whereas, if they buy the same material from domestic industry, it is required to pay 17 percent GST and wait for its ultimate refund after exports which entails a wait of over nine months,” APTMA chief said. He added that the government already owed refunds worth over Rs300 billion to exporters and had no fiscal space for making that payment. “There is no reason for exporters to believe that they will get their sales tax refunded in due time while their prior refunds still remain unpaid, thereby depriving them of liquidity and of their own resources in order to tax local consumption of less than 20 percent of the industry’s output.”

Eliminating the sales tax waiver for a fragmented export industry (80 percent of all output) with a long and complex value chain had increased the production cost for exporters, Ejaz said.

The letter continued that zero rating was rescinded for the export-based industry in the June 2019 budget announcement. The decision was based on a misrepresentation by the FBR that claimed that domestic sales constituted more than 50 percent of all production of the textile sector and somehow the industry was evading approximately $12 billion worth sales tax on domestic sales, APTMA chief claimed.

He stated that domestic sales of the sector do not exceed 20 percent of industrial output, as later conceded by the FBR. “Back in 2019, the government assured industrialists that they will examine the issue in 6 to 8 months, but no such review has been taken even after the passing of 3 years,” concludes the letter.

The Karachi Cotton Association (KCA) has organized One Week Training Course on “Cotton Ginning” with the collaboration of Pakistan Cotton Standards Institute (PCSI) from November 21-25, 2022 at the premises of the KCA with a view to impart basic knowledge regarding the process of cotton ginning.

Copyright Business Recorder, 2022