KARACHI: Local cotton prices have breached Rs20,000 per 40-kg level recently, coinciding with the most recent bull run in international prices where the price of the white fibre touched US 128 cents/pound on international Cotlook-A index, last week, the AKD research said on Tuesday.
The prices are expected to remain downward stick in the coming days as the harvesting season is close to culmination where the total production for this year is likely to settle around 8.5 million bales (as opposed to GoP’s target of 9.5mn bales) and the new crop will likely hit the market towards the tail end of the 3rd quarter.
The recent surge in international cotton prices comes as a result of slowdown in arrivals in India and China as the harvesting season nears culmination. The local prices of the commodity have moved in tandem and the prices have gone up by PkR2000/maund over the last week only.
Yarn margins, which have grown to 70% recently, despite a huge surge in cotton prices, have not been able to keep pace recently and the margins have squeezed to 53% recently. However, we expect most of the textile companies to have done their major buying around PkR15k/maund level and therefore the most recent increase in the commodity prices is unlikely to hit margins significantly as only sporadic buying has been seen recently.
Instead, yarn prices move with a laggard to cotton prices and therefore we expect the yarn margins to pick up in the coming days.
Owing to this increase in the commodity prices, more capital will be tied into the working capital and the short term borrowings of the textile companies will likely remain elevated.
Due to this unprecedented hike in commodity prices, we expect many small textile players may experience liquidity crunch and therefore may struggle to meet export commitments. However, the attractive borrowing cost available on EFF (3%) and timely release of export rebates helps contain the risk somewhat.
The textile industry is going through unprecedented times where the prices of commodities have raised many challenges. However, owing to a plethora of incentives provided by the government, the industry has seen its profitability grow significantly. We have a buy stance on the sector where NML is our top pick with a TP of Rs128/share, offering a total return of 68% on the last close.
The price of raw cotton in Pakistan reached a historic high after rising by over 90 percent this year, mainly due to high global and local demand and short crop, ginners and traders said.
Pakistan, which produced the highest ever output of around 15 million bales of cotton in 2014-15, now continuously faces crop decline, forcing the country to look to the international market to meet the textile sector’s requirements.
As the harvesting season draws to a close, the country’s ginneries received 7.3 million bales of cotton, up from last year’s 5.3 million bales, according to fortnightly data released on January 1, 2022, by the Pakistan Cotton Ginners’ Association (PCGA).
