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Future of Textiles – Uncertainly positive

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November 16, 2020 (MLN): While the broader world faces grim economic prospects due to coronavirus, Pakistan’s textile exporters are having their day. Proceeds from the sector clocked in at $1.190 billion during September, bringing it on almost the same level as of January.

This is accompanied by media reports of revived activity in the textile hub of Faisalabad, where 50,000 power looms have apparently been brought back to life which has created a shortage of 200,000 laborers. Many observers have attributed this recovery to the redirecting of orders towards Pakistan from the regional countries that are still firmly in the grip of the coronavirus outbreak. Add to that the seasonal impact of the upcoming winter holidays in the key export markets.

Perhaps most importantly, a better product mix that included a sizable share of home textiles, which saw a surge in demand due to lockdowns as people flocked to renovate and decorate their homes, helps explain why the sector exhibited a V-shaped recovery. Other than that, the government has also been keen to encourage the export units, offering them subsidized power tariffs while a cheap rupee (until late August) further helped this cause.

All these combined have made investors quite bullish on the stock, as is evidenced by a number of “overweight” stances by brokerage houses. However, before getting too optimistic, it is important to introspect as to how sustainable the current trend is. The bad news, there are a number of roadblocks on the way. First of all, in order to grab the share of regional countries, we must first look at whether our capacity even allows it. Textile machinery imports, a common proxy for that, show a mixed picture: even though they surged month-on-month to $38.89 million in September from $22.614 million in August, the figure reflects more or less the same prevailing pre-Covid era.

Then there is another pressing concern: the declining local cotton production, which is expected to only hover around 5-7 million bales, depending on who you believe. The number of fully operational ginning units has reportedly gone down to just 250, out of the total of 1,200. To plug the gap, the crop needs to be imported but in September, Pakistan bought only $88.566 million worth of raw cotton. Finally, an appreciating rupee of late doesn’t particularly help the export-oriented sector either.

The industry might be pinning hopes on the upcoming Textile Policy 2020-25, under the vision of mostly favorable Commerce Minister Abdul Razak Dawood. But would that really change things drastically? After all, the key demands from their side are tried and tested: zero-rating, power subsidies, and disbursement of rebates. If these are such a panacea to the sector’s ills then why did the explosive growth fail to materialize when these wishes were granted a few years back?

Of course, things have changed since those policies were last in place, of which the most significant is the depreciation of the rupee. Back in the day, the local currency’s artificially overvalued rate adversely impacted the competitiveness of the export-oriented textiles but surely the current uncertainty in the currency markets must also have the sector biting its nails.

As for the new policy, it is expected to fix electricity at 7.5 cents, RLNG at $6.5 per mmBtu, and the domestically produced gas at Rs786 per mmBtu, as well as rationalize duty on the textile value chain. The associations, for their part, are quite confident in the not only meeting but exceeding the reported target of $20.8 billion but the growth trend over the past decade gives us good reason for skepticism.

Across the aisle, players catering to the local market have had it much tougher and still await that recovery. According to Ziad Bashir, a non-executive director at Gul Ahmed Textiles and chairman of the Pakistan Retail Business Council, the industry could take up to 18 months to reach pre-coronavirus levels.

An informed source reveals that around 250 stores have closed down since the Covid-19 outbreak began in the country while a further 150 are at risk if things don’t improve. And this should be a big cause for concern since this market serves as a better proxy towards explaining the local economy and demand.

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Posted on: 2020-11-16T11:22:00+05:00