Research Report on Spinning Sector of Bangladesh-Initiation

8/12/2019 Research Report on Spinning Sector of Bangladesh-Initiation

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Md. Yousuf Harun (Fuad)

Research

[email protected]

Research Report: Spinning Sector of Bangladesh.Date: October 13, 2011


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Abstract

The textiles and clothing sector is segmented into the Textiles Sector (locally known asPrimary Textiles Sector or PTS) and the export-oriented clothing (or RMG) sector. The

textiles sector spans everything from the conversion of raw cotton to yarn throughspinning yarn to weaving gray fabrics as well as finishing, dyeing and printing of grayfabrics.

The textiles sector (PTS) is the backbone of the clothing industry because it provides thebackward linkage for both the knit and woven sectors. Textile mills set-up in the 1990sand later have the latest equipment and machinery and are thus able to provide top-quality yarn and fabrics. The textile mills produce the inputs needed by the RMGindustry, so there are substantial cost savings. The domestically produced inputs henceplay a significant role in reducing lead time.

A correlation between the pattern of export trade in clothing and the growth in spindle

capacity shows that whenever PTS achieved substantial growth, apparel exportsreceived a boost. This demonstrates that availability of local inputs not only reduces thelead time but also increases the competitiveness of RMG Units.

However, recent change in GSP facilities will increase the cost of textile millers & cutdown the profit margin (competitive price, use of diesel oil to use their full capacity due tothe energy crunch, marketing cost). But, this loss of profit for the Bangladesh textile millscould be for short term period. In the longer run, it would help the industry to upgradeitself and compete with the best in the world. In any case, they will continue to enjoy thelogistic benefit.


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Acronyms and Abbreviations

PTS = Primary Textile Sector

RMG = Readymade Garments

GSP = Generalized System of Preference

USDA = U.S. Department of Agriculture

NCDEX = National Commodities & Derivatives Exchange Ltd.

BTMA = Bangladesh Textile Mil Association


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1. Structure of Bangladeshs Textiles and Clothing Sector

The textiles and clothing sector is segmented into the Textiles Sector (locallyknown as Primary Textiles Sector or PTS) and the export-oriented clothing (orRMG) sector. The textiles sector spans everything from the conversion of rawcotton to yarn through spinning yarn to weaving gray fabrics as well as finishing,dyeing and printing of gray fabrics. The final manufacturing stage of apparelssub-sector is called the clothing (RMG) sector. The domestic market is self-sufficient in capacity in almost all phases of the value-added chain, though theoutput garments fail to meet the export quality criteria. Thus the domesticsupplies remain separate from the export-oriented clothing market.

The textiles sector (PTS) is the backbone of the clothing industry because itprovides the backward linkage for both the knit and woven sectors. Textile millsset-up in the 1990s and later have the latest equipment and machinery and arethus able to provide top-quality yarn and fabrics. The textile mills produce theinputs needed by the RMG industry, so there are substantial cost savings. Thedomestically produced inputs hence play a significant role in reducing lead time.

The success of the export-oriented clothing industry has depended on four keyfactors: (a) quality, (b) price, (c) lead-time and (d) reliability.

This profile will mainly focus on the export-oriented sub-sector, highlighting thedomestic market characteristics.

Textile Industry

Cotton

Taao

ArtificialFibres

Spinning Mill/

Yarn Production

Weaving Mill/

Fabric Production

Finishing

Clothing Industry

Woven Garments Knitted GarmentsCutting Sewing Pressing Finishing

Export

Purchasingagencies

Production

BD Domestic Market

Wholesalers Retailers

Home Textiles

Silk

Figure 1 Structure of Bangladeshs Textile and Clothing Industry

e textiles and clothingctor is segmented into

Textiles Sector

cally known asmary Textiles SectorPTS) and the export-ented clothing (or

MG) sector.


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A correlation between the pattern of export trade in clothing and the growth inspindle capacity shows that whenever PTS achieved substantial growth, apparelexports received a boost. This demonstrates that availability of local inputs notonly reduces the lead time but also increases the competitiveness of RMG Units.

The table below illustrates this:

Source: BTMA

2. Spinning Sector

Most spinning mills of Bangladesh produce low-grade yarn. The existing capacityis not enough to produce good quality combed yarn and polyester/cotton blendedyarn for meeting the requirement of the clothing industry. The products of the

spinning sub-sector are cotton yarn, polyester, synthetic yarn, woolen yarn andblended yarn mixed of cotton and polyester of different counts (mostly up 80scount). Yarns are being used by the weaving sub-sectors like specialized textiles,handlooms, and knitting and hosiery.

The growth in the export of clothing with the phasing out of MFA in 2005 has ledto the setting up of 350 spinning mills. Since 2001 there has been a boost ininvestment. The private sector spinning mills can now meet around 100%demand of yarn at the domestic level as well as 95% of the demand for yarn forexport oriented knit fabrics mills. In addition, almost 85% of cotton yarns, and50% demand for synthetic and blended yarn of export-oriented fabric producingmills are being met by the private sector spinning mills:

-20%

0%

20%

40%

60%

20

01-02

2002-03

20

03-04

2004-05

20

05-06

20

06-07

20

07-08

20

08-09

20

09-10

Comparative Growth Pattern: Spindle Capacity & Clothing Export

Growth in Clothing Export Growth in Spindle Capacity

enever PTS achievedbstantial growth,parel exports receivedoost

e private sectornning mills can nowet around 100%

mand of yarn at themestic level as well as% of the demand forn for export orientedt fabrics mills.


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Time line for spinning mills:Year Event

Pre-

1947

The textile industry consists of 11 composite textile mills, having 1.1

million spindles for spinning and 2700 loom capacity for weaving. Inaddition, there is a handloom cottage industry

1956 Capacity increases to 3.2 million spindles

1972

Capacity declines to 0.8 million spindles. All textile mills are

nationalized and put under the management of Bangladesh Textile

Mills Corporation (BTMC)

1982Privatization of textile mills starts as the Government adopts an

open market policy

1999Capacity reaches 2.4 million spindles in the private sector and 0.4

million spindles in the public sector

2007Capacity grows to 6.3 million spindles in 290 private mills and

remains at 0.4 million spindles in the 20 public mills

2008 Capacity grows to 7.2 million spindles in 341 mills.

2009 Capacity grows to 7.6 million spindles in 350 mills.

Source: BTMA


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2.1 Raw Cotton (Supply Side)

2.1.1 Local Production

Bangladeshs own cotton crop is very limited to 50 70 thousand 170-Kg balesper season while its cotton consumption is high between 4.0-4.5 million 170-Kg

bales. Domestic production of raw cotton can hardly meet 2 percent of its demandof the country. In Bangladesh, cotton is steadily losing acreage to other competingcrops like potato, maize, flowers, vegetables and rice as cotton cultivation issusceptible to excessive rainfalls/floods and pest infestations. Lack of shortduration, high yielding and pest tolerant varieties and relatively low market pricefor cotton vis--vis other competing crops are major constraint affecting cottoncultivation.

Figure: Area and Production of Raw Cotton in Bangladesh

YEARAREA HARVESTED

(Hectare)

PRODUCTION

Bales* Tons2002-03 47,640 74,640 14,3232003-04 49,118 82,140 14,9342004-05 44,000 73,190 13,3102005-06 49,770 77,000 14,0002006-07 42,100 70,530 12,8242007-08 28,707 42,380 7,7052008-09 32,600 50,600 9,200

2009-10 31,500 66,000 14,000

*1 bale = 400lbs

Source: Cotton Development Board (CDB), Government of Bangladesh

mestic production ofw cotton can hardlyet 2 percent of the

untries demand


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2.1.2 Import

Thus, Bangladesh has to import almost all its cotton requirements to feed itsspinning industry. In 2010 seasons, Bangladesh reportedly imported 827,000Metric Tons 170-Kg bales from different countries of which prominent importsources are Uzbekistan-42 %, India-22 %, Africa-10 %, U.S.A-11 % and Pakistan-

7%.

Import Trade Matrix

Country: Bangladesh Units:Metric

tons

Commodity CottonTime

period: Aug-JulImportsfor 2007 % 2008 % 2009 % 2010 % 2011 %

Uzbekistan 350,000 57% 336,000 53% 352,000 47% 345,000 42% 260000 31%Others

U.S. 37,000 6% 39,000 6% 94,000 13% 90,000 11% 80000 10%

Africa 35,000 6% 36,000 6% 59,000 8% 80,000 10% 100000 12%

India 60,000 10% 76,000 12% 139,000 19% 180,000 22% 260000 31%

Pakistan 36,000 6% 45,000 7% 41,500 6% 60,000 7% 35000 4%

Other CIS 56,000 9% 78,000 12% 40,000 5% 30,000 4% 50000 6%Others notlisted 36,000 6% 30,000 5% 17,800 2% 42,000 5% 45000 5%GrandTotal 610,000 100% 640,000 100% 743,300 100% 827,000 100% 830000 100%

Source: USDA

2010 cotton imports has reached 3.82 million bales (827,000 tons); an increase of11.26 percent compared to previous year, due to competitive import prices and

increased demand from the growing spinning sub-sector. Uzbekistan continues tobe the principal supplier of raw cotton, enjoying 42 percent market share due tocompetitive prices and a short delivery period. India has also emerged as a majorsupplier of raw cotton due to its price competitiveness and geographical proximity.The share of U.S. raw cotton in the Bangladesh import market has increased toabout 11 in MY 2009/10 due to the new generation spinning mills coming intooperation, which prefer the high quality of US cotton. However, U.S. cotton priceswill have to remain competitive (quality and price?) to offset the freight advantageand shorter delivery periods enjoyed by neighboring suppliers.

10 cotton importsve a growth of 11.26rcent compared toevious year, due tocreased demandom the growinginning sub-sector.

zbekistan continuesbe the principal

pplier of raw cotton,joying 42 percentarket share due tompetitive prices andshort delivery period.


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2.1.3 Importing Countries Present Scenario & Outlook for Bangladesh

Uzbekistan-Main Supplier of Raw Cotton to BD:

Uzbekistan is the major source of Raw Cotton for Bangladesh (42% for the year2009/10) and it is expected that it will remain a reliable source for the upcoming

year as for the first time in the history, Bangladesh has asked a foreign countryfor allowing direct investments from Bangladesh in cotton production and textilemanufacturing. A proposal for investment in cotton production will moveBangladesh textile industry ahead of its current state. Recently in a meetingbetween the two delegations (Bangladesh & Uzbekistan) at the Ministry ofForeign Economic Relations, Investment and Trade, Minister Elyor Ganiyevoffered his Bangladesh counter-part of what considered being a win-win proposalfor both the countries. The Government of Uzbekistan agreed to provide asecured supply of 200,000 MT of raw cotton to Bangladesh every year. Inaddition, Minister Ganiyev asked for Bangladeshi investments in thedevelopment of spinning industry of Uzbekistan. The Government of Uzbekistanwill allow Bangladesh investors to produce about 200,000 MT of yarns, of which

100,000 MT can be brought back to Bangladesh and the rest 100,000 MT can beexported to countries of Commonwealth of Independent States (CIS), also anemerging market for textile products. Bangladeshi investors will receive afavorable treatment from the Uzbekistan Government, including a 15 per centdiscount in raw cotton prices and seven-year tax holidays. Bangladeshi investorswill also have access to the CIS countries under a six-billion-dollar free traderegime. The Uzbekistan government holds Bangladeshi entrepreneurs andexperts with high regards due to their enormous success in the textile sector. TheUzbekistan Government is willing to replicate our successes in textile sectors inUzbekistan. This would be a win-win situation for both the nations to become anintegral part of the development of the textile industries of the two countries.

India-The Second Largest Raw Cotton Supplier to BD:

As India is one of the major suppliers of raw cotton to Bangladesh, a few monthsBangladeshs prime export industry textiles suffer badly following Indiasrestrictions on cotton exports. India, the worlds second biggest cotton exporter,took this decision to cool rising domestic prices, which surged more than 25percent since October, 2010 because of poor harvests and expectations ofhigher demand.

But later on India withdrawn the ban as Indias cotton productivity has doubled inthe current decade to 502 kg/lint per hectare. Indias cotton productivity has

increased from 169 kg/lint per hectare in 1980-81 to 267 kg per hectare in 1990-91. The productivity of natural fibre in the country has further gone up from 278kg per hectare in 2000-01 to 502 per kg in 2009-10. After a gap of six months,Indian exporters have resumed exporting cotton to Bangladesh throughBenapole Port on November 1 (2010), following a court order which permittedthem to go for duty-free export of cotton to Bangladesh.

r the first time in thestory, Bangladesh hasked a foreign countryr allowing directvestments fromangladesh in cottonoduction and textile

anufacturing.


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Africa-A Potential Source of Raw Cotton to BD:

Bangladesh would be exploiting the opportunities of importing inexpensive butsuperior quality cotton from Africa. However, time taken to convey the rawmaterial is an issue here, as presently even it is taking months to convey the

material to Bangladesh from these countries. Considering the situation, thespinners/importers in Bangladesh have urged the Sub-Saharan nations to buildup a buffer stock at the countrys port, which would facilitate availability of theraw material within two to three days.

Import Trade Matrix

Country: Bangladesh Units:Metric

tonsCommodity: CottonTimeperiod: Aug-JulImports for 2007 % 2008 % 2009 % 2010 % 2011 %

Africa 35,000 6% 36,000 6% 59,000 8% 80,000 10% 100000 12%

Source: USDA

From the above stat it is obvious that the import share from Africa is increasingyear on year.

Pakistan-Suffered from Flood:

The floods in Pakistan have seriously affected the major cotton growing areasin the Punjab and Sindh provinces. Preliminary information provided bygovernment and industry contacts estimate that more than 1.1 million acres ofthe standing cotton crop have been damaged, resulting in a loss of 1.8 millionbales. Cotton is grown over 3 million hectares primarily in the southern Punjab

and upper Sindh regions along the Indus River. The cotton area occupies 13%of the nations cultivated area. Almost 6% to 8% cotton cultivation land hasbeen washed away by the flood. So it is considered that import from Pakistanwill be lower than the previous year.

USA- Becoming a Good Choice for Local Spinners:

The share of U.S. raw cotton in the Bangladesh import market has increasedto about 11% in MY 2009/10 due to the new generation spinning mills cominginto operation, which prefer the high quality of US cotton. However, U.S.cotton prices will have to remain competitive (quality and price?) to offset thefreight advantage and shorter delivery periods enjoyed by neighboringsuppliers.

rica is becoming anernative source of

expensive butperior quality cotton

oods in Pakistan haveriously affected thetton production of theuntry


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3 Recent World Cotton Production Condition According to severalreport cotton output in 2010-2011 will boost up due to the higher price ofcotton over the last year

Meanwhile, world cotton output for 2010-11 crop years has been revised from25.1 million tons in February 2011 to 24.9 million tons in March, The Economic

Times said mentioning an NCDEX report.

India (5.44 tones), USA (3.98 tones), Brazil (1.91 tones), Australia (1.02 tones)and Uzbekistan (0.98 tones) are expected to see higher production volumes,according to USDA.

With farmers lured by high cotton prices, India cotton output is expectedto reach 6.8 million tones or 40 million bales in 2011-12 , according to areport in the Economic Times. This is a 15 per cent rise in comparison to 33.9million bales in the last year; a bale is 170-kg. Cotton acreage in India jumpedby 8.25 per cent to 11 million hectares in 2010-11. However, Cotton Outlook(Cotlook), a cotton trade journal, has pegged India cotton output at 5.9 million

tones.

China aims to boost output by 13.9 percent to 6.8 million metric tons this year,according to a government report issued at the meeting of the NationalPeoples Congress in Beijing on March 5. Production fell 6.3 percent to 5.97million tons last year, the National Bureau of Statistics said Feb. 28. Pakistan(1.91 tonnes) may come down due to crop damages.

Global consumption of cotton is estimated at 25.38 tonnes for 2010-11, evenas the expected production is to the tune of 25.02 tonnes for the same period.Meanwhile, Pakistan government may set a cotton production target for theensuing 2011-12 crop seasons at 15 million bales.

s per USDA andCDEX report this yearorld cotton productionll experience a boost


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Cotton Outlook's 2010/2011

World Raw Cotton Supply & Demand Forecasts

2009/2010 2010/2011

Major Producers August Forecast Change onSeason

China 6,850,000 6,950,000 100,000

United States 2,654,000 4,071,000 1,417,000

India 5,015,000 5,525,000 510,000

Pakistan 2,032,000 1,960,000 -72,000

Uzbekistan 850,000 1,050,000 200,000

African Franc Zone 479,000 590,000 11,000

Turkey 380,000 475,000 95,000

Brazil 1,150,000 1,450,000 300,000

Australia 3 63,000 568,000 205,000

Others 2,090,000 2,320,000 230,000

World Production 21,863,000 4,959,000 3,096,000


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Major Consumers

China 10,150,000 10,488,000 338,000

Indian subcontinent 7,678,500 7,936,000 257,500

United States 740,000 740,000

EU 247,000 238,000 -9,000

Others 6,119,000 6,313,000 194,000

World Consumption 24,934,000 25,715,000 781,000

Net Change in Stock -3,071,000 -756,000

Source: COTLOOK


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3.1 CottonYarn

3.1.1 Local Production

Most spinning mills of Bangladesh produce low-grade yarn. The existing capacity iscapable to produce & supply good quality combed yarn and polyester/cottonblended yarn for meeting the requirement of the clothing industry. The products ofthe spinning sub-sector are cotton yarn, polyester, synthetic yarn, woolen yarn andblended yarn mixed of cotton and polyester of different counts (mostly up 80scount). Yarns are being used by the weaving sub-sectors like specialized textiles,handlooms, and knitting and hosiery.

The growth in the export of clothing with the phasing out of MFA in 2005 has led tothe setting up of 350 spinning mills. Since 2001 there has been a boost ininvestment. The private sector spinning mills can now meet around 100% demandof yarn at the domestic level as well as 95% of the demand for yarn for export

oriented knit fabrics mills. In addition, almost 85% of cotton yarns, and 50%demand for synthetic and blended yarn of export-oriented fabric producing mills arebeing met by the private sector spinning mills.

YearsNo. ofMills

SpindleCapacity

Growth in No. ofMills

Growth in SpindleCapacity

1995 84 1,701,823 10.52% 19.56%2000 116 2,289,280 38.10% 34.52%2001 145 2,352,310 25.00% 2.75%2002 163 3,390,026 12.41% 44.11%2003 174 3,419,504 6.75% 0.87%2004 197 3,931,624 13.22% 14.98%

2005 230 4,937,353 16.75% 25.58%2006 260 5,500,000 13.04% 11.40%2007 283 6,000,000 8.85% 9.09%2008 341 7,200,000 20.49% 20.00%2009 350 7,600,000 2.64% 5.56%

Source : Bangladesh Textile Mills Association (BTMA)

The spinning sub-sector of the primary textile sector (PTS) has been witnessingrobust growth over the past decade due to growing demand for yarn from both thedomestic textile market and the export-oriented ready-made garment (RMG)

sector. Yarn production in MY 2009/10 is estimated at 731,000 tons and fabricproduction is estimated at 3.45 billion meters, up by 14 percent and about 6percent respectively from MY2008/09 productions. Bangladesh domesticallyproduced 640,000 tons (around 80% of total requirement) of cotton yarn in MY2008/09 while total cotton yarn requirement is 820,000 tons. The yarn shortfall of180,000 Metric tons (around 20%) is met through imports from different sources ofwhich prominent are India 75%, China 9%, Taiwan 3%, Pakistan only 2%.


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Year

Production Consumption

GAPYarn (000'

tons) Yarn (000' tons)

2002/03 291 525 2342003/04 323 540 2172004/05 430 630 2002005/06 464 680 2162006/07 550 720 1702007/08 602 760 1582008/09 640 820 1802009/10 731 880 149Source: BTMA & Ministry of Textiles, GOB

3.1.2 Import

Bangladesh mainly imported their required yarn from India to fill the demand-supplygap. But the spinning sector of our country has been witnessing robust growth overthe past decade due to growing demand for yarn from both the domestic textilemarket and the export-oriented ready-made garment (RMG) sector as a resultimport of yarn is reducing year on year which states a strong suggestion that ourspinning sector is becoming self-sufficient and carryover of domestic yarns isbecoming more strong. After the change recent change in the GSP rules, the yarnimport may increase significantly in the following years.

However, India continues to be the principal supplier occupying about 75 percent ofthe market share while china remains the second highest position by supplying 7percent.

Import Trade Matrix

Country:Bangladesh Units:

Metrictons

Commodity:Cotton

YarnTime period : Jan-DecImports for 2007 % 2008 % 2009 % 2010 %

India 180,000 72% 162,000 68% 160,000 76% 166,000 75%Pakistan 12,000 5% 8,000 3% 5,000 2% 5,000 2%Indonesia 4,000 2% 4,000 2% 0%Thailand 8,000 3% 10,000 4% 6,000 3% 5,000 2%

Taiwan 5,000 2% 6,000 3% 6,000 3% 8,000 4%China 16,000 6% 25,000 10% 15,000 7% 16,000 7%Others not

listed25,000 10% 25,000 10% 18,000 9% 20,000 9%

Grand Total 250,000 100% 240,000 100% 210,000 100% 220,000 100% Source: USDA

ngladesh mainlyported theirquired yarn fromia to fill the

mand-supply gap.

cent change in theSP rules mayrease the yarnport significantly in following years.


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4 Duty Structure

The duty structure for importing Yarn is as bellows. Yarn & fabric imports for theexport oriented RMG sector enjoy a duty draw back incentives provided by the

government. There are no quantitative restrictions on imports of textile rawmaterials including fabrics. The Government on last November has announced astimulus package to the tune of Taka 1000 crore ($149 million) covering textile andclothing industry to mitigate the negative impact of the recent global recession. Thepackage provides the primary textile industry with bank loan rescheduling facilities,5 percent cash incentive for export of yarn, and access to Export DevelopmentFund (EDF) for import of raw cotton.

Items Import Duty VAT Advance Income Tax License Fee TotalRaw Cotton - - - - -Man-made

Fibers 10% 15% 3% 2.50% 30.50%Yarn 10% 15% 3% 2.50% 30.50%Fabric 25% 15% 3% 2.50% 45.50%Textile dyes-chemicals 15% 15% 3% 2.50% 35.50%

Source: National Board of Revenue (NBR), GOB

5 Skyrocketing Price of Cotton & Yarn A controversy of windfall profit bythe spinners

From April 2010 cotton price started to rise at rocket pace due to several reasons

(flood in Pakistan, Export ban of India to cool down the local price of cotton, poorharvest in China) which increases the COGS of the spinners excessively. To coverthe excessive COGS the local spinners has to increase the output that is yarn price.The increasing yarn price again creates serious trouble to the RMG sector as theyhave the cost advantage over their competitors. And the RMG sector raises theirvoices against the spinners that they are taking windfall profit by increasing the yarnprice much more than the price of cotton. Moreover RMG sector blaming thespinners by saying that millers used higher international cotton prices and its shortsupplies as well as energy crisis as the excuses for charging exorbitant prices aswell as some millers are also hoarding yarn to sell in higher price in the future.

The price hike in the international cotton market compelled the local textile mills to

charge higher prices, as mill-owners shifted a large part of the burden on account ofincreased cotton prices onto the domestic users of yarn in the local knitwear as wellas readymade garment (RMG) sector.


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But the yarn users alleged domestic price-hike is comparatively higher than that ofthe international market.

From the above chart, it is obvious that yarn price movement is very much

consistent with the increasing pattern of the cotton price. Again, the spinners havetaken some advantages over the last few months as the previous GSP rule of originhinder the local RMG to import from other countries.

Cotton & Yarn Price Movement

0

1

2

3

4

5

6

7

8

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Year

Price

($)

Cotton Prices

MonthValue in $

per kg.Increase

Feb-10 0.80Mar-10 0.86 7%Apr-10 0.88 3%May-10 0.90 2%Jun-10 0.92 2%Jul-10 0.84 -8%

Aug-10 0.90 7%Sep-10 1.05 16%Oct-10 1.27 21%

Nov-10 1.55 23%Dec-10 1.68 8%Jan-11 1.79 6%Feb-11 2.13 19%

Mar-11 2.46 15%

Yarn PricesMonth

Value in$

Increase

Feb-10 2.85Mar-10 3.5 23%Apr-10 4.2 20%May-10 4.5 7%Jun-10 4.5 0%Jul-10 3.8 -17%

Aug-10 4.05 8%Sep-10 4.1 1%Oct-10 5.1 24%

Nov-10 5.4 6%Dec-10 5.7 6%Jan-11 5.8 2%Feb-11 5.9 2%

Mar-11 6.3 7%


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5.1 Current Scenario of cotton pr ice and its impact on the industry

From the below charts, it is obvious that from the beginning of the year 2011 cottonprice has started to fall due to bumper harvest of cotton worldwide. Consequently,

India/China exporting their yarn to Bangladesh at a reduced rate due to the bumperharvest of cotton this year.

Source: Cotton A Index

In generally this should benefit the local spinners, as their COGS will be lower.However, the true scenario is different for the following reasons:

However, cotton price is lowering but local spinners are unable to sellyarn at lower prices, as they had bought cotton at higher prices lastyear.

Due to the withdrawal of two-stage GSP facility, RMG exporters canimport yarn and fabric (85%-90% increase in import of fabric) at alower rate. Especially they can get the yarn from India at anabnormally low cost.

ough cotton price isering but localnners are unable to

yarn at loweres, as they hadght cotton at higheres last year.


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5.2 Effect of decline in orders on future earning:

From the above reasons, it is obvious that order to the local spinners will decline

substantially as the RMG can get low priced yarn from other countries due to thechange in rules of origin. Moreover, the local spinners will not be able to take theadvantage of reduced raw material (Cotton) cost instantly as they had bought cottonat higher prices last year. Therefore, this will cause the followings:-

Sales revenue (quantity & price both wil l be affected) will declinefor most of

the spinners unless they have their own forward linkages.

Have to sell the existing inventory below their cost price as they had

purchased cotton during the time of rising price.

The above issues will surely cut down the profit margin of this sector (Makson,

Malek & Metro Spinning Mills Limited). However, this loss of profit for theBangladesh textile mills could be for short-term period.

A Special Noti ficat ion:

The main ingredient of Acrylic yarn is Oil, therefore; it is unrelated to

natural cotton price movement and more related to oil price movement. As a

result,Acryli c yarn producers (R.N.Spinning Mil ls )are less likely to suffer

from low cost yarn supply from other countries (India, China) as unlike natural

cotton India and China has to import the main ingredients of Acrylic yarn i.e.Oil.

Considering the above issues Acrylic yarn producer wi ll maintain their growthprospectas well as profit margin.The only threat to this sector is the low capacityof production.


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6 The new rules of origin- Good news for the RMG but will it be the same forthe Primary Textile Sector (PTS)

The European Unions decision to abolish two-certificate system and go for only one

certification of fabric to garments, would certainly increase the exports of Bangladeshin general and that of RMG in particular considerably. Therefore, there appear brightchances for Bangladesh to avail these opportunities and achieve the export target ofUS $20 billion through exports of garments and some textile products in FY 2010-11.It is to be mentioned that garment exports claim share of about 80 % ofBangladeshs total exports. It is worth mentioning that US and European Unioncountries are main destinations for Bangladesh garment exports claiming some 80 %share.

But our Primary Textile Sector now have to face some hard challenges as under theprevious rule the garment makers are required to buy bulk of their fabrics fromBangladeshi textile plants in order to enjoy zero-tariff benefit in the EU. Now under

the new rule the RMG sector can from outside the country to meet their demand at acompetitive price and again enjoy the duty free access to the EU.

Under the new GSP rules, effective from January 1, exporters will get zero-dutyfacility even if the products are made from imported fabrics. Previously, the exportersused to get this benefit if only local fabrics were used.

As per the new notification of EU regarding change of rules or origin, Bangladeshcan export duty free to EU even if only stage of processing (i.e. garmentmaking in case of apparel) has happened in that country. Consequently,Bangladesh will be able to import fabrics from any country in the world and exportapparel duty free to the EU.

Whois going to benefit?

i. Apparel Expor ters in LDCs : The main winners of this change would be thegarment exporters in Bangladesh as with the effect of the new one-stage rules oforigin, the country's 100 per cent apparel exports to EU, Norway, Switzerlandand Turkey are now availing the GSP benefit, earlier only 42.72 per cent of thewoven-wear textiles could benefit from the GSP system.

ii. Fabric Exporters in nearby countries: Fabric exporters to Bangladesh fromcountries like India, Pakistan, China, Thailand, and Indonesia would be greatlybenefitted as currently they are at a disadvantageous position against the local

mills in Bangladesh who enjoy easy sales due to the GSP benefit that is receivedby garment exporters using their fabrics.

er the new GSPs, effective fromuary 1, exporters

get zero-dutyty even if theucts are madeimported fabrics.


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Whocan be the losers?

i. Bangladesh textile mills (Spinning & Fabric): The textile millers can be thebiggest loser as it loses its main advantage i.e. the GSP benefit. It will now have

to compete with the strong textile industry in India, Pakistan, China and othercountries in the open market. To take an example, currently most denim mills inBangladesh enjoy a sold out position and some mills do not actually have amarketing department! This situation is likely to change.

The Prevoius GSP Policy which requires a two-stage transformation forclothing export facilitated Bangladesh to build up and invest heavily (Euro4.00 bn) into the backward linkage textile industry. Investments made in thebackward linkage industry are large investments and based on a particularcondition. Therefore, any change in the existing Rules of Origin mayhave negative impact on this investment such as leading to closure ofmills and increase redundancy in employment, set backing poverty

alleviation programmed and discouraging potential investors and millsin the pipe line.

It is certainly true that the backward-linkage industries in Bangladesh will facenew competition from foreign suppliers of inputs for the country's exportsector.

In this current situation, the Primary Textile Sector (PTS) of Bangladesh can continueto flourish if they can accomplish the followings:-

i. To remain in the competition they have to set a competitive price which isnow very higher.

ii. Again, to remain competitive in the global market Textile millers have to usetheir full production capacity (right now, at least 30 percent of their productioncapacity remains idle because of the energy crunch). If the millers cannot usethe full production capacity, they will fail to deliver the goods in time, whichwill encourage the garment manufacturers to import the raw materials.


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7 Risk Factors of the sectors

As a policy driven industry, this industry consists of several risks:

Cheap Indian Yarn:

Indian yarn that is low-priced in comparison to local yarn may seize noteworthymarket share local spinners, because of what local spinners will face a situation ofunsold goods or may have to sell below their cost price.

Higher bank rate:

Higher bank rate to obtain loan may create serious trouble to the local spinners. Onthe other hand, their main competitor, India enjoys a moderate rate of only 5% toobtain the loan.

Gas & energy c risis:

Again, to remain competitive in the global market Textile millers have to use their fullproduction capacity (right now, at least 30 percent of their production capacityremains idle because of the energy crunch). If the millers cannot use the fullproduction capacity, they will fail to deliver the goods in time, which will encouragethe garment manufacturers to import the raw materials.

Low cash incentives:

Government grant 10% cash incentives on export of fabric produced locally from

local yarn. To remain in the competition after the change of GSP rule of origin itshould be higher.

Growing foreign competition:

GSP facilities which remained as a safeguard for industry, has been withdrawnrecently. The decision has hit hard the industry as now local RMG producers canimport their required raw-materials from outside the country.


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8 Risk Tying Regional spinning Scenario to Bangladesh/ Contributing factorsto Success for Different Countries

A Close Look at India, Pakistan and China: Comparing Bangladesh with othercountries

China: Contributing factors to Success

Labor- Per-unit labor costs very low due to low wages and high productivity, but now

rising.

Inputs Local production of cotton used to make yarn and apparel and made-up

textile articles.

Business climate Rising labor costs, local currency revaluation vis--vis USD,

workers unwilling to migrate to southern production zones, rising local demands are

some of the current issues facing Chinese manufacturers.

India: Contributing factors to Success

Labor- Huge, relatively inexpensive, skilled workforce; has design expertise.

Inputs-One of the worlds largest producers of cotton.

Business climate - Personal safety, security of shipments between factories and

ports and bureaucratic red tape and infrastructure are issues with many US firms

using agents in lieu of dealing directly with producers.

Pakistan: Contributing factors to Success

Labor- Large, relatively inexpensive labor supply.

Inputs- Access to local supplies of raw cotton, woven and knit fabrics.

Business climate High bank rate, gas and electricity crisis, flood are some of the

current issues facing Chinese manufacturers.


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9. Concluding Remark

From the above it is obvious that the new rules of origin as well as the decreasing trend

of cotton price will increase the cost of textile millers & cut down their profit margin(competitive price, use of diesel oil to use their full capacity due to the energy crunch,marketing cost). Therefore, this year the profitability of this sector may slow down.

However, this setback for the Bangladesh textile mills could be temporary. Over time, itwould help the industry to upgrade itself and compete with the best in the world. In anycase, they will continue to enjoy macro level support and incentive from govt. Besides,importing the raw materials by the RMG sector is expensive due to import duty, tax(Advance Income Tax) etc. as well as higher lead-time of import, which may allow PTSto compete with foreign suppliers.

Disclaimer:

Disclaimer: This Document has been prepared and issued by IDLC Investments Ltd. on the basis of the public information availablein the market, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensurethat the facts & information stated in the Document are accurate as on the date mentioned herein. Neither IDLC Investments Ltd. norany of its director, shareholder, member of the management or employee represents or warrants expressly or impliedly that theinformation or data of the sources used in the Document are genuine, accurate, complete, authentic and correct. Moreover none of thedirector, shareholder, member of the management or employee in any way be responsible about the genuineness, accuracy,completeness, authenticity and correctness of the contents of the sources that are publicly available to prepare the Document. It doesnot solicit any action based on the materials contained herein and should not be construed as an offer or solicitation to buy sell orsubscribe to any security. If any person takes any action relying on this Document, shall be responsible solely byhimself/herself/themselves for the consequences thereof and any claim or demand for such consequences shall be rejected by IDLCInvestments Ltd. or by any court of law.

Documents

Research Report on Spinning Sector of Bangladesh-Initiation