Textiles fumble as cotton prices fly high

As cotton and yarn prices keep rising on the back of global production shortfall and speculations, it is having a nervous knock-on effect on the Bangladesh textile industry – from spinners to fabric makers to both domestic and export-oriented readymade garment producers.

Production cost has gone up considerably for them with varied impacts.

Export-oriented factories cannot make ends meet as global apparel prices are still depressed although orders are  aplenty. Higher yarn cost is putting many out of competition and some have slashed production.

For fabric and apparel manufacturers for the local market, it is a question of hiking their prices or perishing but with the economic recovery still soft, that slashes their sales figures.

Small spinners are losing hope as the price of cotton – their main raw material – spirals out of reach. While a factory in Bangladesh imported 30 count yarn from India at $3 a kg last year, it has to pay $4.1 per kg this year.

Unlike big spinners who maintain offices in Singapore to buy cotton from the futures market and hedge themselves from future volatility, these small spinners – mostly feeding the domestic apparel demand – find it a losing battle.

They cannot maintain overseas offices and have to buy cotton at higher prices. Bangladesh allows only selective hedging, which takes time to be approved by the central bank and is therefore useless when commodity prices vary overnight.

According to cotton market fundamentals and price outlook, New York Nearby and daily A Index prices of per pound cotton rose $0.88 and $0.92 respectively in February this year from $0.56 and $0.60 in May 2020.

The United States Department of Agriculture (USDA) data showed that global cotton production was 26.59 million tonnes in the 2019-20 crop year, which is projected to fall to 24.85 million tonnes in 2020-21. For cotton, the crop year runs from 1 August  to 31 July.

Industry sources said the global cotton price rate is determined on the basis of the US futures market rate.

Giant apparel exporter China, which is also the largest cotton producer and consumer in the world, has now been forced to import more cotton as the Trump administration banned imports on all cotton products from China's Xinjiang province over allegations that the products are made with forced labour from detained Uighur Muslims.

The US ban applies to raw fibres, apparel and textiles made from Xinjiang-grown cotton.

Around 5 million tonnes out of China's total 6.3 million tonnes of cotton were produced in Xinjiang in 2019, according to the data of statista.com and the USDA.

China is importing a large volume of cotton and yarns from India after a few months' suspension caused by the recent border tension.

An industry insider said China has already bought a majority of US cotton from futures markets, causing a disruption in the global cotton supply. 

"I am now buying 30/1 count yarn from India and Indonesia at prices $1 higher than two months ago," said Asif Ashraf, managing director of Urmi Group.

"This has put the operation of my factory just at breakeven," he added.

"Buyers are not ready to pay for the additional cost and we have failed to convince them," Asif said.

Fazlee Shamim Ehsan, chief executive officer at Fatullah Apparels Ltd, said spinners are taking advantage of the cotton price hike by charging excessively.

"The spinners are charging $1-$1.3 extra for 1kg of cotton against a price hike of $0.20-$0.25 per kg, putting us below the breakeven point," he complained.

One of his buyers has sought to halt its order for 25,000 pieces of knit items owing to the cotton price hike, he said.

Mohammad Hasan, owner of the Narsingdi-based Bismillah Textile, said, "We bought 80 count yarn from the local market at Tk230-Tk235 per pound in December last year to produce ladies' clothing, but the price has now increased by at least Tk35-40 per pound."

As a result, per yard fabric cost increased by about Tk5, and it will be very tough to adjust the extra cost with the market prices, he added.

His factory has now halved its production from about 5 lakh yards of cotton fabric a month, he added.

He also claimed that yarn dealers and spinners are charging excessively for yarns on the pretext of the cotton price hike.

Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association (BTMA), said yarn prices have increased because of the high prices of cotton on the global market.

Cotton prices are going up as its production has been projected to drop this year. Besides, China has increased forward buying after a two-year slow run.

Moreover, during the pandemic, the demand for cotton-made knitwear items has increased by about 4% year-on-year in the global market.

Kutubuddin Ahmed, chairman of Envoy Group, said textile millers are facing a shortage of organic cotton as its demand is too high.

In the meantime, some Indian organic cotton suppliers have lost their certification on charges of forgery which also caused a price hike.

"The price of organic cotton has risen to $1.16 per pound from $0.84 per pound three months ago," Kutubuddin added.

The textile miller has booked about 600 tonnes of organic cotton but they did not get on-time delivery, said Kutubuddin, also chairman of the world's first green denim textile, adding, "We received some organic cotton from India but some of them have not sent the certificates even after a long time after the shipment."

According to BTMA sources, Bangladeshi spinning and textile mills have the capacity to consume about 27 lakh tonnes of cotton annually.

The cotton consumption was about 15.89 lakh tonnes last year, while it was about 17.42 lakh tonnes in 2019.

Artificial crisis on freight forwarding

Bangladeshi importers are importing cotton through Malaysia, Singapore and Colombo seaports. A consignment of cotton takes up to three months to reach importers in Bangladesh from West Africa. Nowadays, the lead time has gone up to 6-7 months.

Seeking anonymity, a Bangladeshi cotton indenting agent said, "Our consignment of cotton has remained stuck at a Malaysian port for the last 60 days which usually comes from West Africa within 45 days.

"We have no idea when the goods will be shipped," he added.

The freight forwarders are causing an artificial crisis to charge more, citing container congestion at Chinese ports, which is not totally correct, he explained.

As a result, freight costs have almost doubled, he said, adding that for example, a container freight coming from India now costs about $4,500 from $2,000 in pre-Covid times.

Cotton suppliers, who usually bear freight costs, are now unwilling to do so after a big jump in such costs.

Md Fazlul Houqe, former vice-president at the BTMA, said if this situation does not improve, Bangladesh will lose its competitiveness in the global apparel market.

Bangladesh is the only country and one of the largest exporters of a single item despite not having basic raw materials, added Fazlul Houqe, who is also the owner of two textiles and two spinning mills.