Rehman Naseem, CEO and owner of Fazal Cloth Mills, Ltd. In Multan, Pakistan, presented to the Plains Cotton Advisory Group on March 10, 2023.
Based on his presentation, the challenges facing the textile mill industry include the following:
Supply Disruptions Caused by the COVID-19 Pandemic
Not only was the supply chain broken as complications arose from the global pandemic, but demand skyrocketed. “Certain countries weren’t able to supply the demand,” he said. “Plus shipping of product from destination to the source was disrupted. Retailers were finding it hard to predict when a particular order would arrive so they were ordering more quantity than required due to the level of uncertainty in receiving the goods.” Naseem added that Pakistan was one of the countries that opened earlier than others so its production facilities were able to cash in on this demand. “Cotton consumption in Pakistan shot up to 16 million bales February 1, 2021.”
Inflation
Naseem stated the investment in the textile chain in Pakistan increased in 2021, as everyone expected the demand to remain constant or even increase going forward. Across the industry, from spinning, weaving, production, etc., there was investment in all segments. Unfortunately, inflation caused a different situation in 2022. “The central banks in most countries started raising interest rates and retailers were fearful of a recession and lack of demand as a result, so the focus transitioned to cutting down on inventory.” The second half of 2022, Naseem saw a reduction of capacity by 50% in his mill. China’s retail demand remained very low with their strict COVID policies; though, recently they have started to enter the marketplace. Naseem said his mill is now operating at 70% capacity — Pakistan needs to consume 16 million bales to be at full capacity. Right now, they are expected to consume 12 million bales this year.
Uyghur Forced Labor Prevention Act
Naseem stated this act enforced by the U.S. — along with other countries who imposed their own restrictions on importing goods from cotton grown in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China — has had a negative effect on the textile mill industry as a whole. The restriction policies have put pressure on Chinese cotton prices. For the first time in many years, we are seeing the Chinese cotton price premium for new York futures reduced sharply, trading almost even with New York. Today, it’s trading at 14 to 15 cents above New York, when traditionally — over the last four to five years — China’s cotton price premium has been 25 cents over New York.
“This has a negative impact on our industry because Chinese mills are able to procure cotton at cheaper prices and are exporting yarn at a very cheap price,” Naseem added. “While the U.S. and some parts of Europe are banning Xinjiang cotton, other destinations like South America and Southeast Asia are not. So, a lot of demand has shifted to these cheaper yarns coming out of China. It’s hard for us to compete at this price level, and, once yarn is available at a certain price, the market adjusts to that price, so it’s difficult to ask for a premium.”
Naseem went on to say that he believes this price pressure is one of the main reasons cotton prices remain under pressure. “I expect this will be a critical challenge we will face for another six months until the issue is resolved somehow.”
Naseem’s annual mill use is roughly 450,000 bales per year. He said that Pakistan mills are well covered for the second quarter of the year, but they will need to buy additional cotton in the next six months to get back to 100% capacity. If this happens, he says Pakistan mills will need around three million bales.
The new cotton crop in Pakistan will arrive in August. Naseem acknowledged the tough crop year Pakistan had in 2022 with severe flooding and weather events — ending up with 5 million bales rather than the expected 10 million-plus. “Even during normal production years, Pakistan still imports a net of five to seven million bales per year,” he added. “Almost 20% of all cotton imported is from the U.S.”