Luck, thy name is recession. It appears that a recession in global commodity markets is right around the corner, oddly rescuing Pakistan’s spinning industry. Just last month, it seemed that devastation of domestic cotton crop due to floods would drive net textile export growth into negative territory during FY23. But lady luck seems to have other plans.

Back in late August, various independent forecasts placed Pakistan’s cotton import demand during July 2022 - June 2023 marketing season at anywhere between 5-6 million bales (of 170kg). News from farm spelled doom for the local spinning industry, as up to 75 percent of Sindh’s expected 3 million bales worth crop was reported to have been lost to flooding. This came at a time when world cotton prices still averaged above 125 cents per lb, as unit price of imports during that month average well above 130 cents per lb.

A lot has changed since then. Since August 15th, world cotton prices have dropped over 40 cents, closing at 81 cents per lb earlier this week (Monday). It increasingly looks like that monthly average price may easily average below 90 cents, lowest in at least 16 months. In fact, near term forecasts suggest cotton prices may stay around 75 cents per lb (or ~$1.8 per kg barrier) for rest of the marketing year 2022-23, keeping yearly average price in the 90 cents per lb (or $2 per kg) territory.

That’s great news for Pakistani spinners, who were all set to import record quantities of cotton fiber during the ongoing marketing year. In fact, an earlier forecast by BR Research projected annual cotton import bill at $2.25 billion (or a range of $2 - $2.5 billion), based on various pricing scenarios ranging between $2 - $2.75 per kg and import volume ranging between 5 – 5.5 million bales (of 170kg). This would have meant cotton import rising by at least 10 – 40 percent in value, adding anywhere between $200 - $700 million to the trade bill.

But three-month into the trade year and the cotton import bill seems well under control. For 3MFY22, Pakistani spinners imported 0.3 million fewer cotton bales compared to the previous year, staying on the sidelines due to higher pricing dominating international markets at the time. Now, world prices have effectively collapsed (compared to peak levels kissed just five months ago). Floods may have very well destroyed Pakistan’s cotton crop, but world markets have remained unfazed. For reference, Cot look ‘A’ Index had climbed to $3.61 per kg in May 22, highest in over 11 years.

If world prices average around 100 cents per lb (or between $2 - $2.25 per kg) over the next 8 months, fiber import bill may very well remain range bound at same level as last year, well below $2 billion per annum. If prices continue to fall even more precipitously, import bill may as well decline, but that may not bode well for pricing of exports, either.

And that’s only if Pakistan still imports record amount of cotton. During 3MFY22, monthly imports averaged at 260 thousand bales. Imports may very well pick momentum by December (once local crop arrivals end) peaking around February. But in the most optimistic scenario, imported cotton demand struggle to push past 4.75 million bales given the ensuing slowdown in global apparel demand.

Will spinners then use the opportunity to build inventories, considering the rising unreliability of local crop dynamics? Either way, with generous subsidies now secured on energy tariffs, spinners cannot possibly ask for better days. Time to turn fortunes around during recession. Happy profits!