Decline in China’s Exports
Opportunity for Pakistan’s textile sector — II
Coronavirus has brought the Chinese economy and polyester and textile industries in the country under pressure. Parallel to the 2003 SARS crisis, polyester demand could decrease as business activities stopped. There are common fears among the business operators of the polyester chain. Central China, where Hubei is the center of the network, is practically at a standstill.
Hubei is a major manufacturing centre for the textile industry, with a large number of apparel, print and dyeing firms. Long-term paralysis of transport will mean that no fibres or fabrics products produced in the main production sites in the coastal regions of China will be sent inland. The shipment to other parts of China and shipments of garments and other finished textile goods could also come to a halt.
While China encourages the reopening of factories, coronavirus consequences have already become inevitable for producers abroad. South-East Asia has faced the major consequences, where raw material industry which rely on China is struggling as its suppliers are drying up. Buyers from the Western markets are heading to China for the next season to deal with garment exporters. As a result of the spread of coronavirus, most of the trips have been cancelled and the buyers have started to make contacts with other countries.
It is the time now to analyze markets to find gaps that can be filled by Pakistan. China’s exports to the US in textile sector were almost USD 46 billion in 2018. The top 3 major export items are Articles of Apparel and Clothing Accessories, Knitted or Crocheted, Articles of Apparel and Clothing Accessories, not knitted or crocheted, and other made up textiles which have exported values of USD 17.6 billion, USD 14.5 billion and USD 8.8 billion. Interestingly, Pakistan’s top 3 major textile exports item to the US are also these three products that have been mentioned earlier and their export values are USD 1 billion, USD 0.6 billion and USD 1.38 billion, respectively. So the data shows a large market size is going to be available for grabs in coming days and we should avail this chance to enhance our exports and capture market.
In the 1990s the global demand for man-made fibre (MMF) was 19,000 KT, which reached 60,762 KT in 2015. In last three decades, the demands for fiber has increased enormously due to increase in population which is nearly equal to 84,870 KT. This increase in demand is not only associated with the increasing growth of population but also other factors such as rising incomes, change in demand of traditional textile products, affordable fibers; textiles and apparel products have also played an important role in the progression of global textile fibers.
World textile market consists of 26% cotton and 62% Synthetic whereas Pakistan’s textile has a ratio of 79% cotton and 19% synthetic. Out of Synthetic global export market of USD 489 billion, Pakistan has secured only 0.8%.
According to the United Nations, the world population is expected to touch 8.1 billion by 2025 and is moving up the food chain, producing over 35 percent of the potential food market, heading to tough competition among other arable land crops. In comparison, this increase in population will decrease the limited availability, by causing a food crisis, of arable and cultivated land and, thus, restrict access to arable land and production of cotton.
As a result of the increased consumption of MMF, the increasing demand for natural and man-made fiber textiles is expected to grow at almost 60%. This is because, in the coming decades, the raw material supply for MMF production is predicted to be nearly limitless and significantly lower than the cost of natural fibres. Therefore, the use of MMF against natural fibre, as well as the unrestricted use of these fibres in research and production, to change properties so that it can be optimized for new applications, is another aspect that guarantees this limitless supply. In the near future as well as in the long term, these factors will be a major driving force in MMF demand.
World textile preferences are enormously changing in favour of synthetic textiles with current ratio of consumption of synthetic fibres against natural fibres at 70:30, with synthetic fibres having the lion’s share – a decade ago it was 30:70. Pakistan is fighting for a larger share of a shrinking market by sticking to natural fibres. Our entire value chain needs to be revamped with focus on Man-made fibres growth to capture additional market share.
There is 7% customs duty on the import of polyester staple fiber with total import expenses in the range of 20% including antidumping duty. So even if import duty is finished, protection in excess of 10% will still remain. This is against the principle of cascading. The irony is that if you import directly MMF yarns you will be subject to a reduced import tariff of 5% (under the South Asian Free Trade Agreement) to 10%, in Chapter 55, for MMF yarn imports, resulting in a synthetic yarn industry unsustainable. In the last year alone, MMF yarn production capacity decreased by 36%.
As a result, imported PSF (Input into our spinning mills) is higher than world prices. The domestic MMF yarn production remains uncompetitive even in the domestic market as a result of the aforementioned regulatory failures.
Historically, the local producers in chemical industries (PTA & PSF) have enjoyed a high level of protection. A 25 percent import tariff was introduced in 1998-99, when MMF-based textiles became a major factor in the textile sector worldwide. Later it was reduced to the current levels of 7% duty plus 11% anti-dumping. Unlike emerging competitors in Vietnam and Cambodia, RMG manufacturers import more MMF fiber than fabric. In order to be relevant and competitive, Pakistan is required to produce a 50:50 cotton-to-synthetic fibre mix, while it is currently at 80:20.
In the misplaced protection, the government of Pakistan has placed duties on MMF imports to protect PTA and PSF plants in a country working on arguably outdated and inefficient plants. If the government wants to protect these plants, it should not be done at the cost of the entire textile value chain. Policies like in 2003, of deemed duty drawback, can be reintroduced. The entire textile industry should not be forced to cross-subsidise PTA and PSF plants in Pakistan.
On the domestic front, our policies are distorting both cotton and synthetic fibre market. The share of Pakistan in 2019 for the US overall imports of textiles and apparel was 2.69 percent, as per the Textiles and Apparel Department, the US, and 5.7 percent for cotton-based products. The gross imports of man-made fiber of the United States in 2019 was of $50 billion in which Pakistan’s share was of $221 million. This means that our global market share will continue to decrease if we fail to live up to new world preferences.
Currently, polyester is the most widely consumed man-made fabric. Meanwhile, polyester is in effect heavily taxed at the input level. The National Tariff Commission had, in the second quarter of 2016, imposed anti-dumping duties on PSF from China. PSF imports from China had declined since the imposition of provisional duties in October 2016, resulting in healthy demand from the downstream PTA industry.
Given the importance of taking into account consumer preferences in an industry such as textiles, Lotte’s protection needs to be reduced to an appropriate level and duty on MMF yarn must be adjusted in order to encourage the domestic MMF industry to grow and meet the requirements of the industry.
Our policies have been retrograde in the last years that even the “cotton” perceived to be the bedrock of our textile industry is levied 11% import duty given the steady decline over cotton production over the last three years.
During the current crisis, foreign exchange from Indonesia, China, Thailand and India expends between Rs 12 to 16 billion on the import of MMF yarns. In Pakistan, the local production of polyester viscose mixed yarns is approximately 165,000 tons per year. Around fifty thousand tons of PSF yarns are imported annually. This is equivalent in production of 100% polyester, viscose or polyester yarns, polyester viscose mixed, and other synthetic fiber blended yarns of around 15 to 20 domestic mills spun out of a total of 45-50 mills. These mills provide employment to more than 100,000 people.
The cheaper import of PSF yarn has shut down 36 percent of domestic PSF yarn production capacity.
Importers of synthetic mixed yarns not only remove local industries from the market, they also use it to sell the product at a low price equal to India’s. The worst damage to the local synthetic fibre industry is the absence of equal opportunity with higher tariff barriers on imports of raw materials and nominal import duties on MMF yarns, which leads to the pervasive dumping of MMF yarns and fabrics in the market. As due to coronavirus MMF imports from China will also decline, which is a golden opportunity for local MMF manufacturers to fill the market gap.
The imposition of an appropriate regulatory duty on imports of $687 million of MMF material can save employment for well over 100,000 people working in our spinning industry; however, this is not the ideal solution as the best solution would be to establish Pakistan as duty free zone for any MMF product to support the local garments. Moreover, the government would be required to provide rebate on export products where local MMF is used to ensure backward integration. This will encourage establishment of an indigenous MMF value chain. This would ensure that Pakistan can internationally compete in the MMF sector. It is about time the government showed its commitment towards enhancing exports. It can start by rationalizing irrational duty structures imposed on raw materials which are already short in the country.