After a difficult FY11, the new fiscal year has started well for the domestic textile sector which has been in the midst of news lately, ranging from foreign support in attaining the Generalized System of Preference (GSP) plus status to falling cotton prices.
Furthermore, SNGPL has also surrendered to APTMA’s demand to restore gas supply to the sector for a period of 5 days a week instead of 4 days fixed earlier. If all goes well, the textile sector looks to cash in from higher exports to the EU and lower manufacturing and operational costs.
Swedish Ambassador to Pakistan, Ulrika Sundberg, on Saturday, has said that Sweden is making all efforts to help Pakistan achieve the GSP plus status. Pakistan was to get the facility in January but has been denied at the World Trade Organisation (WTO) forum due to objections from India and Bangladesh. Nonetheless, efforts are being made to resolve the issue and get the GSP plus status for Pakistan. Lately, the UK has also supported Pakistan’s position in attaining the GSP plus status. EU contributes 27 per cent of the total textile exports of Pakistan and if the facility is approved, Pakistan’s exports are likely to grow by 900 million euros.
After pressure from APTMA, SNGPL has withdrawn the 3 day gas suspension schedule for the textile industry. Effective from July 10, 2011, the entire textile chain will get uninterrupted gas supply for a period of 5 days instead of 4 which SNGPL had announced earlier. “We believe the move would somewhat ease off cost pressures as increased gas supply will reduce the reliance on expensive fuels such as diesel,” said Bilal Qamar at JS. For our sample companies, fuel and power costs contribute 10 per cent towards the total cost of goods sold, and a 5 per cent decline could improve gross margins by 30-50 bps for NML and NCL.
Peaking in 3QFY10, cotton prices have come down significantly in the domestic market to stand at Rs6,800 per maund. Internationally the prices have shown a similar trend as well based on lower mill demand from China and better crop expectation in the on going fiscal year. This could reduce the sector’s reliance on short term borrowings to finance raw material procurement leading to a lower burden of financial charges in the future. With cotton prices predicted to stabilise in FY12, the profitability of the standalone spinning units will be affected the most as they will not be able to make wind fall gains as a result of continuously rising prices and supply concerns. However, the standalone weavers and other value added units will benefit due to lower yarn prices.
