Islam, who would not disclose his full identity fearing it would affect his loan eligibility, is the owner of one of the giants in textiles, and was expecting a good profitable year until things started tumbling a few months back.
He now stares at a $70 million loss as India and China have started supplying cheap yarn. For Islam this comes on top of an acute gas crisis.
Most spinners like him are on a spin today. For them it was a double whammy -- only at the end of last year they had a nightmarish experience with cotton price spiralling out, and now this glut of cheap imported yarn.
To make their woes worse, the European Union has offered in January this year generalised system of preference (GSP) with single-step conversion, which means a garment exporter will get duty-free export facility if he now just imports fabric and makes apparel. Earlier he had to go through a two-step conversion -- he had to import yarn to turn it into fabric and then into apparel. When this was the system, garment exporters found that use of local yarn was better as they could then get duty-free export facility.
With the offer of single-step GSP, garment exporters are importing cheap yarn from India and China. It makes sense for them. Because why should they bother about costly local yarn, exposing once again the frail planning and the status of competitiveness of our spinning industry that has grown to a Tk 40,000 crore investment today with the help of 25 percent cash incentive on exports, and two-step GSP facility.
And so the spinning industry has grown to a stage when it can fully support "general category" exportable knitwear's requirement for about 2 lakh metric ton of yarn.
The woe of the spinners began at the end of 2010 when the international cotton market suddenly started heating up. While a pound of cotton sold for 60-70 cents in October-November, it hit $1.75 a pound in January 2011 and pushed further up to $2.5 in March.
The spinners suddenly found all their projections going haywire. The loans they were allowed by their financiers to buy cotton before the price hike, could now buy them even less than half their requirement.
Another parallel development started taking place around that time. India slapped an export restriction on cotton in November-December, allowing exports on limited quota only. This helped India stabilise its internal cotton market but not at the cost of farmers. It offered a 300 rupee higher support price for every quintal of cotton to farmers. Thus with its clever policy, India satisfied both the farmers and the industry.
As India restricted its export, Bangladeshi importers who had opened letters of credit with Indian exporters worth 10 lakh bales (300 pounds equivalent to one bale) could not get most of their orders. This is a significant volume as Bangladesh's total requirement is 60 lakh bales (US measurement where 500 pounds make one bale). Whatever little quantity they received it came at double the price at about $1.7 to $1.8 a pound.
Right now, no new cotton harvest is expected until November-December in northern hemisphere except in Australia. Only Pakistan will harvest some small quantity in South
Asia. This situation demands that yarn should be costly. But contrarily, India has now the advantage of producing cheap yarn, because it stocked cotton when prices were low. It is currently selling yarn at a significantly lower price of $3.9 a kg while Bangladeshi yarn manufacturers find that because of their costly cotton procurement, their breakeven price of yarn comes to $5 a kg.
Because of one-step GSP facility, readymade garment exporters are not interested in such costly local yarn.
Besides India, China -- the largest consumer of cotton -- has also secured its supply by taking position in the future and spot markets. It had the added advantage of low internal interest rate to keep its purchase price low. Now it can sell yarn at a lower price.
The whole situation has become so precarious for the local spinners that many of them fear to go bust if the situation continues for a few more months. And with them the banks will be in trouble.
The spinners have worked out that if cash incentive for garment exporters is increased from 5 percent to 15 percent in case of local yarn use, and if spinning loans are put on a moratorium for a year or so as it was done during the global depression, they might find a way out of this situation.
But then they might not, as they also need a structural change to their operation on the international market. They need to operate like others do, with the help of commodity tools like hedging and take price advantage. The central bank allows hedging on a limited scale on a case to case basis, which actually does not serve any purpose as one cannot wait for permission while hedging. Hedging decisions need to be taken swiftly.
And unless modern decision-making process is incorporated in business, subsidies could be a way of life for them.
The Daily Star, June 22, 2011
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