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All signs point towards highest cotton import bill in history, with conservative estimates placing import volume north of three million bales. The last time import volume kissed that height, import bill touched an all time high of $1.1 billion. But not yet.

Recall that provisional crop estimates place deficit in domestic production anywhere between 5 to 7 million bales, based on average mill consumption of 15 million bales annually. At current international prices, this would translate into full year import of anywhere between $1.5 to $2 billion, or incremental loss to trade balance compression efforts of $61-102 million per month, over FY19 base.

But hold on: raw cotton (HS code: 5201) imports during 1HFY20 stood at just $87million; in fact, showing a decline by almost a quarter in both value and volume terms, compared to same period last year. Does that mean bulk of imports will take place in the second half? That is of little surprise, considering imports made during Jul-Dec period have a share of no more than 10 – 15 percent in full year volume.

The skewed import calendar is a function of seasonal tariffs imposed on cotton trade in the first half of financial year to protect domestic producers during the cotton harvest season. While cotton arrivals in domestic ginneries begin mid-August and continue till March, more than 80 percent of crop is harvested by December end.

Although imposition and removal of duty on cotton import has become an annual affair, the decision taken in the year-end ECC meeting in no way looked like a foregone conclusion. The raw material faces 3 percent RD, 2 percent additional CD, and 5 percent sales tax, which given the commodity deficit would have translated into incremental tax revenues anywhere between Rs19 to 25 billion. Surely not a trickle in the times of austerity!

So, is the import here yet? Market sentiment indicates otherwise. For one, ECC decision came into effect beginning 15th January; and second, provisional import figures from PBS show no unusual uptick in month-on-month figures - which means shipments are yet to reflect.

While PRAL representatives were unavailable to comment, Chairman Karachi Cotton Exchange Khawaja Muhammad Zubair notes that the ‘import gold rush’ will begin February onwards, and will see volumes touch anywhere between three to five million bales.

But what of the price? The last time Pakistan’s cotton saw such severe shortfall against target was in the flood years FY11, when price in the international market went on a bull run that touched $3.5 per kg. It took another three years before sanity was restored to prices, as they dropped back under $1.8 per kg, and have averaged there ever since.

Is a re-run in the works? Not really. The shortfall resulting from the floods was unexpected, whereas Pakistan has missed many a crop targets since that year, as domestic cotton crop output has been on a secular decline over the past decade. This means that poor supply from Pakistan has by now been built-in to global commodity outlook.

Nevertheless, lowest production in 25-years has had its consequences. Beginning Aug-19 when first domestic crop estimate came in – and target was already revised down by 20 percent – global market prices began to climb after a three-year bear run. Ever since, prices have been on an upward trajectory, increasing by close to 9 percent in the last six months.

Does that mean another poorly time tariff decision would result in higher unit prices for import? It appears that the shrewdness of domestic spinners has saved the day. Off the record conversations with one of the largest textile exporters indicates that forward contracts for imports were already entered way back when prices began to stretch in September last year.

KCA chairman adds that cotton import by five biggest buying houses constitute over fifty percent of market share, who appear to have timed the market based on missed crop targets over past several seasons.

This is further corroborated through commercial banking channels, where trade counters have confirmed that import LCs and contracts were issued between Aug and Dec-19 at unit price ranging between $1.4 to $1.65 per kg.

If that’s correct, then average import unit price would be lower by at least 10 to 15 percent compared to PBS figures for FY19. The billion-dollar question mark, however, remains on the quantum, which it appears won’t be known until end of February.