Cotton, textile industries to face even harder situation in coming days

Pakistan's cotton production in 2010-11 season has finally reached the level of 11.698 million running bales ex-gin against 12.693 million running bales produced last season-shortfall being 7.84% from last season.
It is unfortunate that in Pakistan there is no system to determine the correct amount of cotton produced and consumed except that Pakistan cotton ginners' Association release periodical cotton production and consumption data as provided by the ginners on the basis of number of bales.
Since our cotton bales widely vary in weight practically from as low as Kgs 90 to as high as Kgs 180.
In other cotton producing countries, the variation in weight is very limited and is well taken when converting local weight bales into metric tons or into world standard weight bale of 480-lbs. As per rules of Karachi Cotton Association, average weight of our bales should be 375 lbs = 170 Kgs. each.
In the absence of correct data on cotton production, we can plan our domestic annual cotton requirements and shortfall or excess. The Karachi Cotton Association, Karachi is an apex body to operate, monitor and regulate cotton activities through Karachi Cotton Exchange but practically it has no technical work except establishing daily Spot Rate. Cotton Hedge Market (Future trading in cotton) was suspended some 35 years ago and has not been restored as yet. Only on paper technical committees are formed, selection of directors and chairmen are selected turn by turn. International agencies which compile cotton data also feel difficulty in determining the correct size of our crop in terms of tonnage as weight bales varies widely. We should evolve a system, which may help us in determining the correct size of our production and consumption in terms of tonnage.
On 6th May, 2011, the Securities and Exchange Commission of Pakistan, Islamabad issued its press release granting approval of introducing the future contracts in cotton to the Pakistan Mercantile Exchange Limited (PMEX). It has clearly been mentioned in the press release that this is a predetermined standardized cash settled future contract which replicates to a greater degree an international cotton future contract and is different from spot or forward trading.
The contract size will be of 5,000 pound of cotton, which would be settled through cash in Pakistani rupee. Reportedly, the Karachi Cotton Association was also trying to get approval for restoration of cotton hedge market but their efforts did not bear fruits as perhaps being weak and inefficient. There is a great resentment among the cotton brokers who are holding valid working license as their hopes of restoration of cotton activities in Karachi Cotton Exchange appear to have gone on ventilator. Now, the cotton brokers are sure that their working licenses, which valued handsomely only recently are now simply a paper. Perhaps, there were around 300 licenses and the brokers have lost hundreds of millions of rupees.
Now we should look forward for commencement of business in Pakistan Mercantile Exchange Limited. Even, when physical delivery is not there under the present arrangement yet it may benefit the operators in fighting against wide price fluctuations and risk of losses. How, the KCA reacts to this arrangement of doing business in future contracts under PMEX, is yet to be seen.
Cotton sowing in early areas has already been completed while in late areas of Sindh and Punjab is in progress. First contract in new crop was reportedly concluded in April month at Rs 6,400 per maund for delivery by the end of June while first contract in Punjab was made at Rs 7,000 per maund for July delivery. Field reports indicate that harvesting in new crop may commence in June month in early cotton sown areas of lower Sindh especially Badin area in Sindh and parts of central Punjab in Punjab province.
The drastic fall in cotton prices may discourage cotton growers in extending cotton area. Officially, the sowing target is 8.01 million acres (= 3.25 million hectares) in 2011-12 season. Area effects the size of cotton crop but conducive weather conditions play more important role in cotton production. Hopefully, we may harvest a bumper cotton crop of over 14.0 million 170-Kg bales.
Cotton prices are under selling pressure and after touching the peak level of Rs14,000 on 8th March 2011, it is now selling around Rs8,000 per 37.324 Kgs exgin. New York Cotton futures have also crashed from peak level of US Cents 227 on 7th March, 2011 (March contract) to US Cents 127.55 per pound July contract on 13th April, 2011. The effect of the exorbitantly high prices touching peak levels in the first week of March has so deeply penetrated that all those holding stocks of textile goods right from raw cotton to garments are losing heavily.
Perhaps the only buyers were the speculators who have gone with the winds. In my previous analysis, I had mentioned that demand and supply position in 2010-2011 was not so poor as it was in 2009-2010 season because 2010-11 cotton produced about 14 millions bales more than 2009-10 season globally and in next cotton season (2011-12) the world cotton production is likely to be 10 million bales more than current season, the only reason for abnormally high cotton prices was speculation.
The situation is returning to normal. China, which was the biggest buyer of cotton and yarn has completely stopped buying. Markets have collapsed. One or two weeks before, there were heavy cancellations in US 2010-11 season sales which were more than weekly sales. Cotton situation in Pakistan, India, China and China is very poor. Sale of yarn has almost come to standstill and prices of yarn and cotton are on decrease. The losses of the players are increasing. In view of decreasing cotton and yarn prices in Pakistan, position with the banks is going in minus. In other words, stocks of cotton and yarn pledged with the banks are losing their value.
The banks demand deposits from the clients to match the lower valuation of stocks. On report mentioned that amount of banks' non-performing loans has doubled in five years period 2005-2010. If this situation persists any longer, the number of defaulters will increase. In Pakistan, there are reports of closure of more than 80 spinning mills due to financial difficulties and incurring losses. Small units of weaving, finishing and processing are in great difficulty. The heavy load shedding of power (Electricity and gas) has badly effected short and medium size textile units specially in Faisalabad area. Despite all odds, the export performance of 10 months July-April-11 has been quite satisfactory which has crossed the level of US $20.0 billions and US $10.0 billions home remittance, thanks to high unit prices and anxiety among Pakistanis working abroad.