Only a year ago, the readymade garments sector was spooked by the highest price of cotton in a decade amid a surge in global apparel demand.
Apprehensive of further price hikes, many textile owners started to procure high-priced cotton to add to their stockpiles.
It was a risk, but the alternative was to wait while prices ticked up even higher, as Bangladesh still does not have hedging practices – which is an investment position intended to offset potential losses or gains that may be incurred by a companion investment.
Soon the global economy began to hint of a global recession, the situation turned and cotton prices fell.
The cost of the raw material slipped 49% from its May peak, dropping to $0.79 per pound from $1.55 according to ICE Futures US.
This otherwise happy turn of events has, however, spelled disaster for textile companies who are yet to get rid of their high-priced cotton.
Khorshed Alam, chairman of Little Star Spinning Mills Ltd, told The Business Standard (TBS), “The price drop alone will cost importers a loss of $16 lakh for the pre-booked cotton.”
Compounding the problem is the existing gas crisis, which has greatly affected production and dimmed any hopes of overcoming obstacles to make gains from falling cotton prices.
Millers at a press conference on Saturday said the production of gas-dependent textile mills had dropped 40% due to severe gas shortage.
Bangladesh Textile Mill Association (BTMA) President Mohammad Ali Khokon feared that 60% of gas-dependent textile mills will be closed in the next few months if the situation does not improve.
They demanded uninterrupted gas supply, expressing willingness to pay extra.
The troubles don’t end there. The oncoming recession, complicated by a global fall in apparel demand and high dollar prices, now threatens closing of a number of textile factories.
Spinners don’t smile at cheap cotton prices
But the fallen price of cotton, a key raw material for ready-made garments, is not good news for the millers.
In any other time, this would be a cause for celebrations for local spinning owners and apparel entrepreneurs. But in the face of a global recession, it means little.
Cotton was bought at higher prices to make yarn amid turmoil in the global market and the fear of further price hikes. Now, a huge amount of yarn has been accumulated amid dwindling demand.
While the high priced cotton stockpile sits in the godowns, new shipment of cotton bought at higher prices is now reaching the country.
This will increase their losses due to the higher cost of opening import letters of credit (LCs) amid a strong US dollar.
Bangladesh is the second largest importer of cotton in the world, only producing 1% of its cotton demand. The country relies on imports of the material from India, the US, Brazil and countries in Africa.
After making an agreement, the shipment arrives around six months later, although Indian cotton arrives faster.
Mohammad Ali Khokon, president of BTMA, said, “The yarn, made of cotton bought at higher prices, has not been sold while fresh cotton shipments are arriving one after another, making the entrepreneurs of this sector nervous.
“If this continues till December, many factories will go bankrupt,” he warned.
A Matin Chowdhury, managing director of Malek Spinning Mills Ltd and former president of BTMA, said, “We cannot reap the benefit of the current price fall as many people have booked in advance due to the fear that the price will increase in the future. Now they will have to import cotton at higher prices. Some factories have already closed due to losses. There will be more closures if the market doesn’t pick up quickly.”
Amid the devaluation of taka against the dollar, orders worth $1 billion have already been cancelled in the last few months due to reduced demand for yarn.
In other words, the LC was not confirmed after initial discussions, many businessmen claimed.
Md Fazlul Hoque, managing director at Israq Textile Mills Ltd and vice-president of BTMA, told TBS that he now has to count losses of $1.5 per kilogramme of yarn.
A mill producing 60-tonne yarn per day is incurring a loss of $90,000, he added.
Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) said, “Since the price of cotton has been falling for a long time, most of the buyers have kept their orders on hold. Now the price of clothing is being renegotiated and we have to accept it too. As a result, we do not have the opportunity to get the benefits of the falling price.”
According to a report published in the Wall Street Journal on 28 September, the online retailer ASOS recently warned that profits would be at the low end of its full-year forecasts. Primark, a fast-fashion brand, warned of lower profits ahead.
Lifted by interest-rate increases from the Federal Reserve, the dollar has soared, increasing the cost of US-grown cotton for overseas mills. According to the BTMA, Bangladesh imports 11% of its total cotton demand from the US.
Other central banks around the world are also lifting rates, moves analysts expect will slow growth and eventually hurt consumer demand for clothing and other cotton goods.
“With the increase in interest rates and general recessionary fears, inflation – the thought is there will be more spent on food, fuel, necessary items for living as opposed to clothing, furniture, etc.,” said Donna Hughes, a risk consultant with StoneX Group.
This observation is confirmed by the recent statistics on Bangladesh’s export of ready-made garments. According to the Export Promotion Bureau (EPB), the country’s garment exports fell by 7.5% last September.
The entrepreneurs of this sector believe that even garment exporters will not be able to take advantage of the cotton price dip.
Cotton prices started to rise in May last year as the demand in the global market increased amid the start of economic recovery from Covid-19.
Ready to pay higher price for gas
Since June, millers have been paying Tk16 per cubic feet (cft) of gas used for captive power, up from Tk13.85.
The BTMA president calculated that if 500 million cubic feet of gas (mmcf) supplied by Petrobangla is available under a long-term contract and 200 mmcf is purchased from the spot market at the current rate ($25 per MMBTU), the gas price will cost around Tk22 cft.
Several directors of the BTMA have said they are willing to pay the premium price.
BTMA President Mohammad Ali Khokon showed four other alternative price formulas, calculating weighted cost at Tk23 and Tk25 per cft if import price is $30 and $40 per MMBTU.
He said that they will submit the calculations to the government.
Khokon said 90% of factories were in dire straits due to the gas crisis, which kept units closed for 12 hours. Only 10% of the factories are slightly better.
Gas supply situation is most critical in Narayanganj, Narsingdi, Savar, Gazipur, Cumilla and Chattogram.
Production in these areas has come down to an average of 30% to 40%. Due to this, the production cost per kg of yarn has increased to $1.25 and doubled. Spinning mills cannot be closed even if there is no gas.
He said these reasons had pushed many textile mills on the brink of bankruptcy, adding, “How will I repay the money to the bank? Workers will lose jobs, many banks will fail, and investors will turn away.”
He said that if energy is not guaranteed, then investments are bound to take a hit.
Hedging a promising way out
Due to the rapid fluctuation of commodity prices worldwide, hedging is practised to reduce the risk of buyers. It, however, is yet to be practised in Bangladesh, with few importers even aware of the method.
The latest rounds of fluctuations in different markets around the world has brought hedging to the limelight, but the Bangladesh Bank, as the authority for approving hedging, has not developed any comprehensive framework in this regard.
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. In this case, the risk is taken by a third party, such as a bank.
A local company, in an attempt to pioneer the move, approached the Standard Chartered Bank for hedging assistance for cotton import.
A delay in getting approval from the Bangladesh Bank meant nothing came of it in the end.
Naser Ezaz Bijoy, managing director of the Standard Chartered Bank, told TBS, “It takes more than 10 days to get approval from the Bangladesh Bank. The price fluctuated a lot during this period, for which we did not move forward.”
“If a commodity hedging structure is developed, maybe hedging would be functional in Bangladesh,” he added.
Echoing the same, A Matin Chowdhury, managing director of Malek Spinning Mills Ltd and former president of BTMA, said, “A complete structure of hedging has not yet been created in Bangladesh. Importers are also unaware of it.”
The textile industry employs around one million people and owners had chalked out plans to make a fresh $3 billion in investment only last year.
