18 July 2004	Sunday	29 Jamadi-ul-Awwal 1425

KARACHI, July 17: China may be happy over its bumper cotton crop of around 30 million bales - 36 per cent higher than 22 million bales it produced last year -but does that come as bad news for rest of the world, including Pakistani exporters?

Market observers predict world outlook on the cotton crop to remain extremely bullish for the year following. Prices in the US market having gone down by 10 cents per pound to 47 cents from 57 cents, which the market observers blame on China, which withdrew from the market.

"This news has jolted the textile spinners, mainly exporters of yarn," says Faisal Shaji, who follows the textile sector for Capital One Securities. He observes that some reports suggest that foreign importers of yarn were now asking Pakistani exporters to re-negotiate the price due to the above mentioned development. "Many textile companies have lifted cotton in bulk at a price as high as Rs3,100 per maund to Rs3,400 per maund, though prices have now dipped to as low as Rs2,675 per maund," says Shaji.

Moreover, prices prevailing at the Karachi Cotton Exchange were also depressed as ginners were holding unsold stocks of around 400,000 bales from the FY03-04 crop. Spinners who booked cotton at the high price of around 53 to 55 cents per pound are also believed to be passing sleepless nights, the price in US markets having plunged to 47 cents per pound.

World cotton output is also expected to increase to 103 million bales as against 92 million bales last year. Pakistan is competently in the race with estimated output to be higher by 10 per cent from the production a year ago. "This expected glut of cotton may be good only for textile manufacturers in the longer run as their gross margins would start showing an increasing trend in the later half of the FY05 if we compare that to relatively squeezed position in the 2H-FY04," says analyst at Capital One.

Textile companies have been expanding their installed capacity base, all round and over $4.4 billion have been invested by major textile companies in the last four years. The impact of increase in cotton supply would be marginalized in the 2H-FY05 as benefits of higher installed capacity begin to pay dividends and Pakistani textile products received better market access in the post-WTO era.

Tanvir Abid, head of research at Jahangir Siddiqui Capital Markets (Pvt) Ltd. notes that textile producers were focusing their attention on WTO regime, effective from January 2005 through improvement in production. He observes that as per the 2004-05 budgetary announcements, BMR/expansion activities would result from slash in import tariffs on plant and machinery.

Moreover, measures such as reduction in industrial-power rates would serve to improve the competitiveness of the sector. Exports of textile, which accounts for 65 per cent of the country's entire exports, stood at $8,090 million for FY04 representing improvement of 12 per cent over the earlier year.

"It is, therefore, imperative on the part of the government to cater to the requirements of the sector," says the JSCM analyst, adding that various positive steps were taken to benefit the sector in the recent budget including the removal of sales tax on cotton ginning stage. "Though sales tax is a pass-through item, nevertheless, its removal and rate of reduction would significantly improve cashflows of textile manufacturers, thereby lowering financial costs," says Abid.

Khalid Iqbal Siddiqui, analyst at InvestCap, acknowledges a record global cotton production this season and lower prices and recalls that local textile sector had performed well in FY04 to- date, even with record high cotton prices in the country.

Revenues and profits were up 20pc and 62pc, respectively during 1H2004 (Oct 2003 - Mar 2004) based on a sample of 30 listed textile firms. Even though margins have declined, with gross margin down from 13pc in 1H2003 to 11pc in 1H2004, profits had grown due to a heavy 36pc reduction in financial charges (owing to rescheduling of debt at lower rates). Importantly, US was looking to abolish textile quotas for Pakistan from January 2005 in line with the WTO agreement. US was also planning to terminate visa arrangements for textile and apparel trade with Pakistan.

"This", says the InvestCap analyst "is yet another positive development for Pakistani textile exporters, especially Nishat Mills, as the US would not limit exports from Pakistan from 2005."

Profitability, would be revenue driven rather than interest rate driven, according to Khalid, who foresees improved profitability for the textile sector in FY05, due to higher revenues, cheaper credit and abolition of GST on cotton.