Pakistan’s textile industry has endured a mixed year, ranging from a sharp fall in cotton prices from its all time peak levels to the escalating energy crisis. Cotton prices peaked in March 2011 resulting in windfall gains for the textile chain during 1H2011. However, since then prices have tumbled to Rs5,400 per maund (down 58 per cent from its peak) due to growth in cotton output.
In addition, gas shortage in the country especially during the ongoing winter season has put more burdens on the sector. Hence, the textile sector has so far underperformed the local bourse by a massive 19 per cent.
The 1H2011 witnessed cotton prices rallying to all time peaks internationally and domestically on the back of limited supply and escalating demand. As a result, the textile chain made windfall gains during that period with exorbitant margins. However, prices have since then taken a breather and come down significantly to $0.93 per lbs.
Domestically as well, the prices have contracted by 58 per cent to Rs5,400 per maund from its peak level of Rs13,000 per maund in March 2011. As evident from 1QFY12 results, we do not see the windfall gains made by the industry to continue in the future on account of improved global cotton production which is expected to keep prices at current levels, said Bilal Qamar at JS. Also, Pakistan’s cotton production is expected to reach 12.6 million bales, up eight per cent from last year. nevertheless, lower cotton prices will somewhat reduce textile manufacturers’ reliance on short term borrowings which can lead to reduced financial charges.
Since the start of the year, the country has faced acute gas shortages resulting in massive production losses or reliance on expensive alternate fuel such as diesel. For our sample companies, fuel and power costs contribute 10 per cent towards the total cost of goods sold, and a five per cent increase could result in a decline in gross margins by 30-50 bps for NML and NCL.
With the decline in cotton prices and global cotton production expected to surge by 11 per cent to 26.8 million tonnes in FY12, the profitability of the stand alone spinning units will be affected the most. Spinners will not be able to make windfall gains which they had made last year on account of continuously rising prices and supply concerns. However, the standalone weaving units and other value added units will benefit due to lower yarn prices.
Furthermore, composite units like NML and NCL could somewhat manage the current situation as they are elastic in switching focus in-between their segments. Also, we expect additional working capital lines (taken last year due to expensive cotton) to decrease resulting in lower finance costs in FY12, he added.
Cotton
Comments are closed.