Consolidation In 2008: Pakistan’s Mills Will See Slowed Growth
January 26, 2009 The assassination of Pakistan’s former Prime Minister Benazir Bhutto in late December 2007 sent shockwaves throughout the region and the world, destabilizing an already precarious political environment and postponing the much anticipated national elections. In the week after the assassination, reports circulated that textile mills, as well as cotton bales, were set ablaze as some Pakistanis rioted in the wake of Bhutto’s death. Several mills were vandalized and burned, as well as a few thousand cotton bales, but this will have little impact on total textile consumption, according to reports close to the Pakistani trade.
However, the political unrest and uncertainty for business investments will damper growth for the next year. Combined with a lackluster 2007 domestic crop and the weakening of Pakistan’s major export markets, this year’s outlook for Pakistan’s cotton trade and textile industry could be dismal. While the country’s textile leaders believe this year will see more restructuring, Pakistan’s textile sector has many favorable aspects that signal strong growth in the long-term.
Outlook for 2008
Shafqat Shaikh, the 2007 Chairman of All Pakistan Textile Mills Association and the Managing Director of the Nagina Group of textile mills, believes 2008 will bring restructuring to the textile sector as the industry promotes mergers and acquisitions to develop economies of scale for procurement and sales. This could cause a lag in growth for this year, but as larger operations absorb these smaller mills, they should see additional revenue streams and possibly better margins.
“We feel that 2008 will not be a major growth year, but we do feel it will be a year of consolidation, which is a requirement of the industry right now. This will make us very competitive,” Shaikh said. “Textiles in Pakistan are more than 85% exported, so we have to be regionally and internationally competitive. Like everywhere else in the textile world, there is going to be complete re-orientation of where the buyers are going to buy and who they are going to buy from. I think the market is dictating it, driving it in fact – not just in Pakistan, but all over the world.”
Pakistan is the world’s leading exporter of home linens, and the majority of those goods are shipped to the United States. With the U.S. sub-prime shakeout and a possible recession looming, U.S. homebuyers are not purchasing homes; and when they do, many are downsizing to smaller homes or condos. This has a negative trickle-down effect on the home textiles market as consumers aren’t buying new towels, bed sheets and curtains. Many Pakistani textile companies are feeling the squeeze, according to Ahmed Ebrahim, Director of Al-Karam Textile Mills Limited in Karachi.
“At the moment, the biggest problem for Pakistani mill and textile companies is that the U.S. market is going down. Retailers are not buying. Because of the financial crisis in the United States, the housing industry is affected in a big way, and of course we are linked to the housing market. The orders are not coming because people are leaving their larger houses and moving to flats, and nobody is buying new draperies or sheets and other household linens,” Ebrahim said. “When the U.S. housing market is growing, it is good for us. But unfortunately this year, the U.S. market is bad. And I think it is going to affect us further. I think 2007/08 will continue to be a down year for Pakistan.”
Pakistan’s textile exports aren’t the only numbers down in recent months. The mealy bug and leaf curl virus severely reduced the Pakistani crop from the previous year’s 12.5 million bales to probably 10 to 10.5 million bales, according to several merchant and mill estimates. That would leave a shortfall of 4 to 5 million bales needed to meet domestic consumption. The gap will be met by Brazilian growths which have already been delivered, as well as Indian cotton. Between 1 to 1.5 million bales (170 kg) from India have been sold into Pakistan during recent months, with approximately 25% to 30% currently delivered. Some Pakistani merchants expect a large portion of the remaining Indian bales will be defaulted because of rising market prices, and one merchant believes only about 750,000 Indian bales will be delivered. This could bode well for U.S. and West African growths supplying Pakistan with residual cotton, but it could take several months before sales pick up.
Poised for Prosperity
This next year may be a time of restructuring and slowed growth for Pakistani textiles, but don’t assume this is a long-term trend. Pakistan is poised for greater growth in the not too distant future. First of all, Pakistan will be in a very favorable economic position after mills consolidate. Pakistan’s government is an advocate of a deregulated, market-driven economy that has been growing at 7% to 8% annually. Because Pakistan’s textile mills already succeed in a deregulated market, they will have an advantage over their main competitors, China and India, when those governments reduce support and subsidies.
“If you look at the immediate regional competitors, India and China, they are having developments in their economies that are benefits for us. For example, if you look at the exchange rates for both India and China, they are appreciating. If you look at China, the subsidies, which are the main drivers for exports, are realigning themselves. And we know there are huge subsidies in India, and this probably will not last for long either,” Shaikh said. “So as these industries get less support, we are in a better position because we are not really surviving on government support; we are surviving on our own business sense. It is a much more market dictated industry, and I think this will make us more competitive than our regional players.”
Another advantage is Pakistan’s well-orchestrated trade agreements, most notably with China and possibly the U.S. A free-trade agreement (FTA) with China will allow duty-free imports of Pakistani yarns and fabrics for Chinese domestic consumption. This FTA for textile commodities begins in July 2008, as well as a reduction in tariffs on readymade garments (RMG). Currently, the tariff on RMG imports into China is 16%, but this year it will be reduced to 10.08% – and by 2010, it will be lowered to 8%.
“Up until now, China has been an importer of (textile) commodities, processing them, and then re-exporting. But there are a billion people (in China), and they need domestic textiles too. As the affluence in China grows, we think their internal consumption should rise also,” Shaikh said. “Of all the major textile-producing countries in the world, only Pakistan has duty-free access for domestic consumption in China with commodities like yarn and fabrics. I think this is the market for the future, and if we are able to position ourselves ahead of the rest of the world, it will be a great advantage for us.”
In addition to this FTA, a possible agreement between the United States and Pakistan could spur textile investment in northern Pakistan, where the October 2005 earthquake devastated the country. The agreement would establish Reconstruction Orientation Zones (ROZ) where garments could be manufactured for duty-free access to the U.S. market. While this agreement needs approval from the U.S. government before they proceed with details, Shaikh said a similar agreement with Egypt has set precedence, and he believes the U.S.-Pakistan agreement is at a “very mature stage.”
“The U.S. government and Pakistan would like to see some re-development in these areas. The textile industry, for every dollar spent, is one of the largest employment generating industries. So production of garments in the ROZ regions would have duty-free access to the United States, and this would be as big of an incentive as the FTA with China,” Shaikh said.
Cooperation: Worldwide and Regionally
Pakistan’s agreements with worldwide trading partners aren’t the only deals on the table. Regional discussions with other textile manufacturers in the Indian sub-continent to develop a cohesive marketing strategy are also beginning to take shape. During a cotton conference in December, leaders from Pakistani and Indian textile associations met to determine how they could work together to increase prices and sell more units. Spearheaded by Shaikh, this meeting addressed subsidies and world textile prices. Specifically, he posed these two questions to the group:
“Why are we all spending money and scarce resources of third world countries to subsidize textile production for the rest of the world and depress prices? And, why can’t we sit down together and try to create competitiveness without having to spend so much money?”
While the informal meeting was only the first step in a cooperative effort between India and Pakistan, the stakeholders agreed it was a topic worth exploring and decided to further consider other options. Ebrahim from Al-Karam Textile Mills agreed with Shaikh that this partnership could reap major rewards for all involved. With an open dialogue, regional mills could focus less on undercutting each other’s price and specialize in certain areas of expertise.
“India, Pakistan, Bangladesh – all have to talk reasonably and join together. There is plenty of business to go around for us all to share. I can export one thing, another company can export another. If India is making certain things, let them do it, and Pakistan can specialize in something different. This is the way we can do it,” Ebrahim said. “If we fight it, then the sellers are chasing the buyers and lowering the prices. And this will come through regional cooperation – these three countries can work together. Maybe not this year or next year, but it will come. Otherwise, none of us will be able to succeed. We can’t go on lowering our prices.”
This continued spirit of cooperation, joined with Pakistan’s deregulated industry, geographic location and natural resources, will ultimately lead to even more growth in textile consumption if the country can weather the current political instability and a smaller 2007 crop. In the final analysis, Pakistan’s mills that are able to survive a slight downtown in the U.S. market will ultimately be in a good position to expand in the future, growing their output and gaining share in other world markets.
Caption (photo):
Shafqat Shaikh, Former Chairman of All Pakistan Textile Mills Association, and Managing Director of Nagina Group
Caption (photo):
Ahmed Ebrahim, Director of Al-Karam Textile Mills Limited
GET THE NEWSLETTER TODAY!
