Bangladesh is totally dependent on the import of cotton as production in the country accounts for hardly three percent of demand.
The primary textiles sector is comprised of basic sub-sectors like spinning, weaving, dyeing, printing and finishing.
The spinning sub-sector is now facing troubled times for a decline in the consumption of local yarn by the weavers and knitters, as they can purchase the item at a lower price from China and India.
Local spinners have used cotton imported at high rates to spin yarn. But the prices of both yarn and cotton are declining almost everyday since May. As a result, the local spinners are unable to sell the yarn at lower rates.
The local spinners are losing money everyday as they are now bound to sell yarn at $3-$3.40 a kilogram from $7 a kilogram in March and April.
On the other hand, weavers and knitters prefer to import fabric, rather than to buy from the local market, as they are getting a 12.5 percent duty waiver facility even on imported fabric for a relaxation of the rules of origin (RoO) by EU for the least developed countries (LDCs) since January this year.
The EU has changed the RoO under its generalised system of preferences (GSP) for the LDCs, which means that exporters will enjoy zero duty benefits even from using imported fabric.
As a result, garment makers are not bound to purchase fabric from the local market. The earlier, tough RoO shielded the local primary textiles sector for decades as garment makers were bound to purchase local fabric and yarn to enjoy the zero-duty benefits from EU.
Following such a big move by EU, the import of fabric and yarn is increasing and the item is being stockpiled more and more everyday in factories in Bangladesh.
Yarn imports in January-June increased by 18.21 percent from the same time last year, according to data from National Board of Revenue (NBR).
At the same time, the import of woven and knit fabric increased by 51.18 percent and 293.06 percent, which is quite alarming for the country.
In January-June, a total of 278 million kilograms of yarn and fabrics were imported, which is 25 percent higher than the same time last year.
At present, unsold stockpiles of yarn have reached 2.5 lakh tonnes, with a current market valuation of Tk 9,000 crore.
Spinners have already slashed their production capacities to 30-40 percent as stockpiles are increasing everyday at the factories.
In this situation, the import of cotton will decline slightly this year, as yarn consumption is not going up in the dull market, said Razeeb Haider, managing director of Outpace Spinning Mills Ltd at Gazipur.
“The import of cotton in the last three months was insignificant as the spinners have lowered their production capacities to 30 to 40 percent,” he said.
“Now we are offering the widely consumed 30-count yarn at $3.30 -$3.40 per kilogram, which was $4.50-$4.60 per kilogram even a month ago. The price of such yarn was $7 per kilogram during the March to April period.”
“I am churning yarn from my old stock of cotton,” he said. Many importers have already booked cotton in forward, he added.
Now they are in a dilemma as they cannot bring the cotton at the agreed price they signed a contract on at abnormally higher prices, Haider said.
But they have to bring the cotton at the agreed price according to the deal or they have to face arbitration at the International Cotton Association (ICA), Haider added.
In most cases, ICA verdicts go in favour of suppliers as the procedures are completed under English Law, he said. Bangladesh is weak in arbitration in ICA, he said.
“So far, I know nearly two lakh tonnes of cotton are now under contract, which the Bangladeshi importers have to import,” he said. The average price of the cotton would be $2.20 per pound while the price of finished yarn declined to $3.30 a kilogram, Haider said.
Generally, cotton demand stands at 80,000 tonnes a month while the country imports nearly 10 lakh tonnes a year.
The situation compounded when India, the second largest cotton producing country in the world, imposed a ban on the export of cotton in April last year and continued it a long time. The ban was withdrawn when global cotton prices started declining recently.
Jahangir Alamin, president of Bangladesh Textile Mills Association (BTMA), said both the ministers of finance and commerce agreed to sit in a meeting with the spinners on August 21 to discuss the issue as an investment of Tk 30,000 crore in primary textiles is under threat.
He said problems renewed in the sector as banks are reluctant to finance cotton imports.
Bankers argue that the spinners bought cotton at higher rates, but now they are not able to sell. “They fear a risk of defaults for such trade problems,” he said.
He said the importers previously could open fresh letters of credit on old contracts, but now they are not interested in the same.
On one hand, spinners cannot sell their yarn at lower prices and on the other hand, they are facing a shortage of working capital.
As a result, they cannot import cotton at lower prices when global prices declined.
He said over the last three years, fresh investment in primary textiles was not so high as the caretaker government was in power and an inadequate supply of gas and power in the industrial units.
So, reasonably, the import of cotton will be less compared to other times, he added.