Global Perspective: Pakistan'S Cotton Consumption Hit A 21 Year Low

According to the February supply and demand forecast report of the US Department of Agriculture, Pakistan's cotton output in 2022/23 was 3.9 million bales, the lowest level in nearly 40 years. The tight supply of cotton has seriously affected the country's cotton consumption. This month, Pakistan's cotton consumption was reduced by 200000 bales to 8.8 million bales, the lowest level in more than 20 years. At the same time, Pakistan's import volume did not change year on year, because the country suffered a serious financial crisis and textile mills were restricted from importing foreign cotton.

In addition to the tight supply, the increase in cotton production and power costs also affected cotton consumption, leading to the contraction of textile mill profits. For the major cotton producing countries, the cotton price fell by more than 20% last year, but the cotton price in Pakistan rose by more than 10%. The difficulty of cotton import and the long-term high and frequent fluctuations of domestic cotton prices led to the decline of the purchasing capacity of textile mills and the decline of the operating rate of factories. In a recent government report, in November 2022, the production index of Pakistan's cotton mills fell by nearly 30% year on year.

Pakistan needs sufficient foreign exchange to import cotton, and its cotton textile exports are the largest source of foreign exchange reserves. The textile industry is Pakistan's largest manufacturing industry, accounting for about 60% of Pakistan's foreign trade exports. As the textile industry plays an important role in Pakistan's GDP, the shortage of cotton supply will slow Pakistan's textile exports and economic growth.

Due to the serious shortage of domestic foreign exchange, local banks have been restricting the import of cotton in US dollars, which has led to the delay of customs clearance documents and difficulties in opening letters of credit for importers. At present, Pakistan's US dollar reserves are at a very low level, and it is unclear when they will be replenished. This uncertainty has led to blocked shipment and difficulties in contract execution.

At the same time, the shortage of foreign exchange and the increase of bank requirements have also significantly increased the transaction costs related to financing and importing cotton. In some cases, the uncertainty of cotton supply has led to a delay in the turnover time of completing export orders, which has led to an overall decline in textile output.

In addition, it is reported that the Bank of Pakistan often requires importers to obtain the support of confirmed export orders for cotton financing, but most local textile companies are not the whole industry chain. Spinning mills import and then sell yarn, and downstream manufacturers export textile products. All of these factors have slowed Pakistan's cotton imports.