Md. Yousuf Harun (Fuad) Research hyousuf@idlc.

com

Research Report: Spinning Sector of Bangladesh. Date: October 13, 2011

Abstract The textiles and clothing sector is segmented into the Textiles Sector (locally known as Primary Textiles Sector or PTS) and the export-oriented clothing (or RMG) sector. The textiles sector spans everything from the conversion of raw cotton to yarn through spinning yarn to weaving gray fabrics as well as finishing, dyeing and printing of gray fabrics. The textiles sector (PTS) is the backbone of the clothing industry because it provides the backward linkage for both the knit and woven sectors. Textile mills set-up in the 1990s and later have the latest equipment and machinery and are thus able to provide topquality yarn and fabrics. The textile mills produce the inputs needed by the RMG industry, so there are substantial cost savings. The domestically produced inputs hence play a significant role in reducing lead time. A correlation between the pattern of export trade in clothing and the growth in spindle capacity shows that whenever PTS achieved substantial growth, apparel exports received a boost. This demonstrates that availability of local inputs not only reduces the lead time but also increases the competitiveness of RMG Units. However, recent change in GSP facilities will increase the cost of textile millers & cut down the profit margin (competitive price, use of diesel oil to use their full capacity due to the energy crunch, marketing cost). But, this loss of profit for the Bangladesh textile mills could be for short term period. In the longer run, it would help the industry to upgrade itself and compete with the best in the world. In any case, they will continue to enjoy the logistic benefit.

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Acronyms and Abbreviations PTS RMG GSP = Primary Textile Sector = Readymade Garments = Generalized System of Preference

USDA = U.S. Department of Agriculture NCDEX = National Commodities & Derivatives Exchange Ltd. BTMA = Bangladesh Textile Mil Association

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1.

Structure of Bangladeshs Textiles and Clothing Sector

Figure 1. Structure of Bangladeshs Textile and Clothing Industry
Cotton Artificial Fibres

Silk

Spinning Mill/ Yarn Production

Textile Industry Fabric Production

Finishing

Weaving Mill/

Knitting Mill

T r a d e A s s o c i a t i o n s

Home Textiles

Clothing Industry
Cutting Sewing Pressing Finishing

Woven Garments

Knitted Garments

Export Purchasing agencies Production

BD Domestic Market Wholesalers Retailers

The textiles and clothing sector is segmented into the Textiles Sector (locally known as Primary Textiles Sector or PTS) and the exportoriented clothing (or RMG) sector.

The textiles and clothing sector is segmented into the Textiles Sector (locally known as Primary Textiles Sector or PTS) and the export-oriented clothing (or RMG) sector. The textiles sector spans everything from the conversion of raw cotton to yarn through spinning yarn to weaving gray fabrics as well as finishing, dyeing and printing of gray fabrics. The final manufacturing stage of apparels sub-sector is called the clothing (RMG) sector. The domestic market is selfsufficient in capacity in almost all phases of the value-added chain, though the output garments fail to meet the export quality criteria. Thus the domestic supplies remain separate from the export-oriented clothing market. The textiles sector (PTS) is the backbone of the clothing industry because it provides the backward linkage for both the knit and woven sectors. Textile mills set-up in the 1990s and later have the latest equipment and machinery and are thus able to provide top-quality yarn and fabrics. The textile mills produce the inputs needed by the RMG industry, so there are substantial cost savings. The domestically produced inputs hence play a significant role in reducing lead time. The success of the export-oriented clothing industry has depended on four key factors: (a) quality, (b) price, (c) lead-time and (d) reliability. This profile will mainly focus on the export-oriented sub-sector, highlighting the domestic market characteristics.

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Whenever PTS achieved substantial growth, apparel exports received a boost

A correlation between the pattern of export trade in clothing and the growth in spindle capacity shows that whenever PTS achieved substantial growth, apparel exports received a boost. This demonstrates that availability of local inputs not only reduces the lead time but also increases the competitiveness of RMG Units. The table below illustrates this:
Comparative Growth Pattern: Spindle Capacity & Clothing Export 60% 40% 20% 0% 2001-02 2003-04 2005-06 2006-07 2007-08 2008-09 2009-10 -20%

2002-03

Growth in Clothing Export

2004-05

Growth in Spindle Capacity

Source: BTMA

2.

Spinning Sector

The private sector spinning mills can now meet around 100% demand of yarn at the domestic level as well as 95% of the demand for yarn for export oriented knit fabrics mills.

Most spinning mills of Bangladesh produce low-grade yarn. The existing capacity is not enough to produce good quality combed yarn and polyester/cotton blended yarn for meeting the requirement of the clothing industry. The products of the spinning sub-sector are cotton yarn, polyester, synthetic yarn, woolen yarn and blended yarn mixed of cotton and polyester of different counts (mostly up 80s count). Yarns are being used by the weaving sub-sectors like specialized textiles, handlooms, and knitting and hosiery. The growth in the export of clothing with the phasing out of MFA in 2005 has led to the setting up of 350 spinning mills. Since 2001 there has been a boost in investment. The private sector spinning mills can now meet around 100% demand of yarn at the domestic level as well as 95% of the demand for yarn for export oriented knit fabrics mills. In addition, almost 85% of cotton yarns, and 50% demand for synthetic and blended yarn of export-oriented fabric producing mills are being met by the private sector spinning mills:

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Time line for spinning mills: Year

Event

Pre1947

The textile industry consists of 11 composite textile mills, having 1.1 million spindles for spinning and 2700 loom capacity for weaving. In addition, there is a handloom cottage industry

1956

Capacity increases to 3.2 million spindles Capacity declines to 0.8 million spindles. All textile mills are

1972

nationalized and put under the management of Bangladesh Textile Mills Corporation (BTMC) Privatization of textile mills starts as the Government adopts an

1982

open market policy Capacity reaches 2.4 million spindles in the private sector and 0.4 million spindles in the public sector Capacity grows to 6.3 million spindles in 290 private mills and

1999

2007 2008 2009

remains at 0.4 million spindles in the 20 public mills Capacity grows to 7.2 million spindles in 341 mills. Capacity grows to 7.6 million spindles in 350 mills.

Source: BTMA

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2.1 2.1.1

Raw Cotton (Supply Side) Local Production

Domestic production of raw cotton can hardly meet 2 percent of the countries demand

Bangladeshs own cotton crop is very limited to 50 70 thousand 170-Kg bales per season while its cotton consumption is high between 4.0-4.5 million 170-Kg bales. Domestic production of raw cotton can hardly meet 2 percent of its demand of the country. In Bangladesh, cotton is steadily losing acreage to other competing crops like potato, maize, flowers, vegetables and rice as cotton cultivation is susceptible to excessive rainfalls/floods and pest infestations. Lack of short duration, high yielding and pest tolerant varieties and relatively low market price for cotton vis--vis other competing crops are major constraint affecting cotton cultivation.

Figure: Area and Production of Raw Cotton in Bangladesh PRODUCTION AREA HARVESTED YEAR (Hectare) Bales* Tons 2002-03 47,640 74,640 14,323 2003-04 49,118 82,140 14,934 2004-05 44,000 73,190 13,310 2005-06 49,770 77,000 14,000 2006-07 42,100 70,530 12,824 2007-08 28,707 42,380 7,705 2008-09 32,600 50,600 9,200 2009-10 31,500 66,000 14,000 *1 bale = 400lbs Source: Cotton Development Board (CDB), Government of Bangladesh

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2.1.2

Import

Thus, Bangladesh has to import almost all its cotton requirements to feed its spinning industry. In 2010 seasons, Bangladesh reportedly imported 827,000 Metric Tons 170-Kg bales from different countries of which prominent import sources are Uzbekistan-42 %, India-22 %, Africa-10 %, U.S.A-11 % and Pakistan7%.
2010 cotton imports have a growth of 11.26 percent compared to previous year, due to increased demand from the growing spinning sub-sector.
Import Trade Matrix Metric Units: tons

Country: Commodity Time period: Imports for Uzbekistan Others U.S. Africa India Pakistan Other CIS Others not listed Grand Total

Bangladesh Cotton Aug-Jul 2007 350,000 % 57%

2008 336,000

% 53%

2009 352,000

% 47%

2010 345,000

% 42%

2011 260000

% 31%

37,000 35,000 60,000 36,000 56,000 36,000 610,000

6% 6% 10% 6% 9% 6% 100%

39,000 36,000 76,000 45,000 78,000 30,000 640,000

6% 6% 12% 7% 12% 5% 100%

94,000 59,000 139,000 41,500 40,000 17,800 743,300

13% 8% 19% 6% 5% 2% 100%

90,000 80,000 180,000 60,000 30,000 42,000 827,000

11% 10% 22% 7% 4% 5% 100%

80000 100000 260000 35000 50000 45000 830000

10% 12% 31% 4% 6% 5% 100%

Source: USDA

Uzbekistan continues to be the principal supplier of raw cotton, enjoying 42 percent market share due to competitive prices and a short delivery period.

2010 cotton imports has reached 3.82 million bales (827,000 tons); an increase of 11.26 percent compared to previous year, due to competitive import prices and increased demand from the growing spinning sub-sector. Uzbekistan continues to be the principal supplier of raw cotton, enjoying 42 percent market share due to competitive prices and a short delivery period. India has also emerged as a major supplier of raw cotton due to its price competitiveness and geographical proximity. The share of U.S. raw cotton in the Bangladesh import market has increased to about 11 in MY 2009/10 due to the new generation spinning mills coming into operation, which prefer the high quality of US cotton. However, U.S. cotton prices will have to remain competitive (quality and price?) to offset the freight advantage and shorter delivery periods enjoyed by neighboring suppliers.

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2.1.3

Importing Countries Present Scenario & Outlook for Bangladesh

Uzbekistan-Main Supplier of Raw Cotton to BD: Uzbekistan is the major source of Raw Cotton for Bangladesh (42% for the year 2009/10) and it is expected that it will remain a reliable source for the upcoming year as for the first time in the history, Bangladesh has asked a foreign country for allowing direct investments from Bangladesh in cotton production and textile manufacturing. A proposal for investment in cotton production will move Bangladesh textile industry ahead of its current state. Recently in a meeting between the two delegations (Bangladesh & Uzbekistan) at the Ministry of Foreign Economic Relations, Investment and Trade, Minister Elyor Ganiyev offered his Bangladesh counter-part of what considered being a win-win proposal for both the countries. The Government of Uzbekistan agreed to provide a secured supply of 200,000 MT of raw cotton to Bangladesh every year. In addition, Minister Ganiyev asked for Bangladeshi investments in the development of spinning industry of Uzbekistan. The Government of Uzbekistan will allow Bangladesh investors to produce about 200,000 MT of yarns, of which 100,000 MT can be brought back to Bangladesh and the rest 100,000 MT can be exported to countries of Commonwealth of Independent States (CIS), also an emerging market for textile products. Bangladeshi investors will receive a favorable treatment from the Uzbekistan Government, including a 15 per cent discount in raw cotton prices and seven-year tax holidays. Bangladeshi investors will also have access to the CIS countries under a six-billion-dollar free trade regime. The Uzbekistan government holds Bangladeshi entrepreneurs and experts with high regards due to their enormous success in the textile sector. The Uzbekistan Government is willing to replicate our successes in textile sectors in Uzbekistan. This would be a win-win situation for both the nations to become an integral part of the development of the textile industries of the two countries. India-The Second Largest Raw Cotton Supplier to BD: As India is one of the major suppliers of raw cotton to Bangladesh, a few months Bangladeshs prime export industry textiles suffer badly following Indias restrictions on cotton exports. India, the worlds second biggest cotton exporter, took this decision to cool rising domestic prices, which surged more than 25 percent since October, 2010 because of poor harvests and expectations of higher demand. But later on India withdrawn the ban as Indias cotton productivity has doubled in the current decade to 502 kg/lint per hectare. Indias cotton productivity has increased from 169 kg/lint per hectare in 1980-81 to 267 kg per hectare in 199091. The productivity of natural fibre in the country has further gone up from 278 kg per hectare in 2000-01 to 502 per kg in 2009-10. After a gap of six months, Indian exporters have resumed exporting cotton to Bangladesh through Benapole Port on November 1 (2010), following a court order which permitted them to go for duty-free export of cotton to Bangladesh.

For the first time in the history, Bangladesh has asked a foreign country for allowing direct investments from Bangladesh in cotton production and textile manufacturing.

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 Africa-A Potential Source of Raw Cotton to BD: Bangladesh would be exploiting the opportunities of importing inexpensive but superior quality cotton from Africa. However, time taken to convey the raw material is an issue here, as presently even it is taking months to convey the material to Bangladesh from these countries. Considering the situation, the spinners/importers in Bangladesh have urged the Sub-Saharan nations to build up a buffer stock at the countrys port, which would facilitate availability of the raw material within two to three days.
Import Trade Matrix Metric Units: tons

Africa is becoming an alternative source of inexpensive but superior quality cotton

Country: Commodity: Time period: Imports for Africa

Bangladesh Cotton Aug-Jul 2007 35,000

% 6%

2008 36,000

% 6%

2009 59,000

% 8%

2010 80,000

% 10%

2011 100000

% 12%

Source: USDA

From the above stat it is obvious that the import share from Africa is increasing year on year. Pakistan-Suffered from Flood: The floods in Pakistan have seriously affected the major cotton growing areas in the Punjab and Sindh provinces. Preliminary information provided by government and industry contacts estimate that more than 1.1 million acres of the standing cotton crop have been damaged, resulting in a loss of 1.8 million bales. Cotton is grown over 3 million hectares primarily in the southern Punjab and upper Sindh regions along the Indus River. The cotton area occupies 13% of the nations cultivated area. Almost 6% to 8% cotton cultivation land has been washed away by the flood. So it is considered that import from Pakistan will be lower than the previous year. USA- Becoming a Good Choice for Local Spinners: The share of U.S. raw cotton in the Bangladesh import market has increased to about 11% in MY 2009/10 due to the new generation spinning mills coming into operation, which prefer the high quality of US cotton. However, U.S. cotton prices will have to remain competitive (quality and price?) to offset the freight advantage and shorter delivery periods enjoyed by neighboring suppliers.

Floods in Pakistan have seriously affected the cotton production of the country

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3 Recent World Cotton Production Condition According to several report cotton output in 2010-2011 will boost up due to the higher price of cotton over the last year Meanwhile, world cotton output for 2010-11 crop years has been revised from 25.1 million tons in February 2011 to 24.9 million tons in March, The Economic Times said mentioning an NCDEX report. India (5.44 tones), USA (3.98 tones), Brazil (1.91 tones), Australia (1.02 tones) and Uzbekistan (0.98 tones) are expected to see higher production volumes, according to USDA. With farmers lured by high cotton prices, India cotton output is expected to reach 6.8 million tones or 40 million bales in 2011-12, according to a report in the Economic Times. This is a 15 per cent rise in comparison to 33.9 million bales in the last year; a bale is 170-kg. Cotton acreage in India jumped by 8.25 per cent to 11 million hectares in 2010-11. However, Cotton Outlook (Cotlook), a cotton trade journal, has pegged India cotton output at 5.9 million tones. China aims to boost output by 13.9 percent to 6.8 million metric tons this year, according to a government report issued at the meeting of the National Peoples Congress in Beijing on March 5. Production fell 6.3 percent to 5.97 million tons last year, the National Bureau of Statistics said Feb. 28. Pakistan (1.91 tonnes) may come down due to crop damages. Global consumption of cotton is estimated at 25.38 tonnes for 2010-11, even as the expected production is to the tune of 25.02 tonnes for the same period. Meanwhile, Pakistan government may set a cotton production target for the ensuing 2011-12 crop seasons at 15 million bales.

As per USDA and NCDEX report this year world cotton production will experience a boost

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Cotton Outlook's 2010/2011 World Raw Cotton Supply & Demand Forecasts 2009/2010 Major Producers Season China United States India Pakistan Uzbekistan African Franc Zone Turkey Brazil Australia 3 Others World Production 6,850,000 2,654,000 5,015,000 2,032,000 850,000 479,000 380,000 1,150,000 63,000 2,090,000 21,863,000 2010/2011 August Forecast Change on

6,950,000 4,071,000 5,525,000 1,960,000 1,050,000 590,000 475,000 1,450,000 568,000 2,320,000 4,959,000

100,000 1,417,000 510,000 -72,000 200,000 11,000 95,000 300,000 205,000 230,000 3,096,000

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Major Consumers China Indian subcontinent United States EU Others World Consumption Net Change in Stock
Source: COTLOOK

10,150,000 7,678,500 740,000 247,000 6,119,000 24,934,000 -3,071,000

10,488,000 7,936,000 740,000 238,000 6,313,000 25,715,000 -756,000

338,000 257,500

-9,000 194,000 781,000

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3.1

Cotton Yarn

3.1.1

Local Production

Most spinning mills of Bangladesh produce low-grade yarn. The existing capacity is capable to produce & supply good quality combed yarn and polyester/cotton blended yarn for meeting the requirement of the clothing industry. The products of the spinning sub-sector are cotton yarn, polyester, synthetic yarn, woolen yarn and blended yarn mixed of cotton and polyester of different counts (mostly up 80s count). Yarns are being used by the weaving sub-sectors like specialized textiles, handlooms, and knitting and hosiery. The growth in the export of clothing with the phasing out of MFA in 2005 has led to the setting up of 350 spinning mills. Since 2001 there has been a boost in investment. The private sector spinning mills can now meet around 100% demand of yarn at the domestic level as well as 95% of the demand for yarn for export oriented knit fabrics mills. In addition, almost 85% of cotton yarns, and 50% demand for synthetic and blended yarn of export-oriented fabric producing mills are being met by the private sector spinning mills. No. of Spindle Growth in No. of Mills Capacity Mills 1995 84 1,701,823 10.52% 2000 116 2,289,280 38.10% 2001 145 2,352,310 25.00% 2002 163 3,390,026 12.41% 2003 174 3,419,504 6.75% 2004 197 3,931,624 13.22% 2005 230 4,937,353 16.75% 2006 260 5,500,000 13.04% 2007 283 6,000,000 8.85% 2008 341 7,200,000 20.49% 2009 350 7,600,000 2.64% Source : Bangladesh Textile Mills Association (BTMA) Years Growth in Spindle Capacity 19.56% 34.52% 2.75% 44.11% 0.87% 14.98% 25.58% 11.40% 9.09% 20.00% 5.56%

The spinning sub-sector of the primary textile sector (PTS) has been witnessing robust growth over the past decade due to growing demand for yarn from both the domestic textile market and the export-oriented ready-made garment (RMG) sector. Yarn production in MY 2009/10 is estimated at 731,000 tons and fabric production is estimated at 3.45 billion meters, up by 14 percent and about 6 percent respectively from MY2008/09 productions. Bangladesh domestically produced 640,000 tons (around 80% of total requirement) of cotton yarn in MY 2008/09 while total cotton yarn requirement is 820,000 tons. The yarn shortfall of 180,000 Metric tons (around 20%) is met through imports from different sources of which prominent are India 75%, China 9%, Taiwan 3%, Pakistan only 2%.

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Production Consumption Yarn (000' Year tons) Yarn (000' tons) 2002/03 291 525 2003/04 323 540 2004/05 430 630 2005/06 464 680 2006/07 550 720 2007/08 602 760 2008/09 640 820 2009/10 731 880 Source: BTMA & Ministry of Textiles, GOB

GAP 234 217 200 216 170 158 180 149

3.1.2
Bangladesh mainly imported their required yarn from India to fill the demand-supply gap.

Import

Recent change in the GSP rules may increase the yarn import significantly in the following years.

Bangladesh mainly imported their required yarn from India to fill the demand-supply gap. But the spinning sector of our country has been witnessing robust growth over the past decade due to growing demand for yarn from both the domestic textile market and the export-oriented ready-made garment (RMG) sector as a result import of yarn is reducing year on year which states a strong suggestion that our spinning sector is becoming self-sufficient and carryover of domestic yarns is becoming more strong. After the change recent change in the GSP rules, the yarn import may increase significantly in the following years. However, India continues to be the principal supplier occupying about 75 percent of the market share while china remains the second highest position by supplying 7 percent.
Import Trade Matrix Country: Commodity: Time period: Imports for India Pakistan Indonesia Thailand Taiwan China Others not listed Grand Total Source: USDA Banglades h Cotton Yarn Jan-Dec 2007 180,000 12,000 4,000 8,000 5,000 16,000 25,000 250,000 Units: Metric tons

% 72% 5% 2% 3% 2% 6% 10% 100%

2008 162,000 8,000 4,000 10,000 6,000 25,000 25,000 240,000

% 68% 3% 2% 4% 3% 10% 10% 100%

2009 160,000 5,000 6,000 6,000 15,000 18,000 210,000

% 76% 2% 0% 3% 3% 7% 9% 100%

2010 166,000 5,000 5,000 8,000 16,000 20,000 220,000

% 75% 2% 2% 4% 7% 9% 100%

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4 Duty Structure The duty structure for importing Yarn is as bellows. Yarn & fabric imports for the export oriented RMG sector enjoy a duty draw back incentives provided by the government. There are no quantitative restrictions on imports of textile raw materials including fabrics. The Government on last November has announced a stimulus package to the tune of Taka 1000 crore ($149 million) covering textile and clothing industry to mitigate the negative impact of the recent global recession. The package provides the primary textile industry with bank loan rescheduling facilities, 5 percent cash incentive for export of yarn, and access to Export Development Fund (EDF) for import of raw cotton.

Items Import Duty VAT Advance Income Tax Raw Cotton Man-made Fibers 10% 15% 3% Yarn 10% 15% 3% Fabric 25% 15% 3% Textile dyeschemicals 15% 15% 3% Source: National Board of Revenue (NBR), GOB

License Fee 2.50% 2.50% 2.50% 2.50%

Total 30.50% 30.50% 45.50% 35.50%

5 Skyrocketing Price of Cotton & Yarn A controversy of windfall profit by the spinners

From April 2010 cotton price started to rise at rocket pace due to several reasons (flood in Pakistan, Export ban of India to cool down the local price of cotton, poor harvest in China) which increases the COGS of the spinners excessively. To cover the excessive COGS the local spinners has to increase the output that is yarn price. The increasing yarn price again creates serious trouble to the RMG sector as they have the cost advantage over their competitors. And the RMG sector raises their voices against the spinners that they are taking windfall profit by increasing the yarn price much more than the price of cotton. Moreover RMG sector blaming the spinners by saying that millers used higher international cotton prices and its short supplies as well as energy crisis as the excuses for charging exorbitant prices as well as some millers are also hoarding yarn to sell in higher price in the future. The price hike in the international cotton market compelled the local textile mills to charge higher prices, as mill-owners shifted a large part of the burden on account of increased cotton prices onto the domestic users of yarn in the local knitwear as well as readymade garment (RMG) sector.

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But the yarn users alleged domestic price-hike is comparatively higher than that of the international market.

Cotton Prices Value in $ Month Increase per kg. Feb-10 0.80 Mar-10 0.86 7% Apr-10 0.88 3% May-10 0.90 2% Jun-10 0.92 2% Jul-10 0.84 -8% Aug-10 0.90 7% Sep-10 1.05 16% Oct-10 1.27 21% Nov-10 1.55 23% Dec-10 1.68 8% Jan-11 1.79 6% Feb-11 2.13 19% Mar-11 2.46 15%

Yarn Prices Value in Month Increase $ Feb-10 2.85 Mar-10 3.5 23% Apr-10 4.2 20% May-10 4.5 7% Jun-10 4.5 0% Jul-10 3.8 -17% Aug-10 4.05 8% Sep-10 4.1 1% Oct-10 5.1 24% Nov-10 5.4 6% Dec-10 5.7 6% Jan-11 5.8 2% Feb-11 5.9 2% Mar-11 6.3 7%

Cotton & Yarn Price Movement

8 7 6 5 4 3 2 1 0 Nov-10 Jun-10 Feb-10 Oct-10 Jan-11 Jul-10 Feb-11 Mar-10 Apr-10 May-10 Aug-10 Sep-10 Dec-10 Mar-11

Price ($)

Year

From the above chart, it is obvious that yarn price movement is very much consistent with the increasing pattern of the cotton price. Again, the spinners have taken some advantages over the last few months as the previous GSP rule of origin hinder the local RMG to import from other countries.

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5.1

Current Scenario of cotton price and its impact on the industry

From the below charts, it is obvious that from the beginning of the year 2011 cotton price has started to fall due to bumper harvest of cotton worldwide. Consequently, India/China exporting their yarn to Bangladesh at a reduced rate due to the bumper harvest of cotton this year.

Though cotton price is lowering but local spinners are unable to sell yarn at lower prices, as they had bought cotton at higher prices last year.

Source: Cotton A Index

In generally this should benefit the local spinners, as their COGS will be lower. However, the true scenario is different for the following reasons: However, cotton price is lowering but local spinners are unable to sell yarn at lower prices, as they had bought cotton at higher prices last year. Due to the withdrawal of two-stage GSP facility, RMG exporters can import yarn and fabric (85%-90% increase in import of fabric) at a lower rate. Especially they can get the yarn from India at an abnormally low cost.

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5.2

Effect of decline in orders on future earning:

From the above reasons, it is obvious that order to the local spinners will decline substantially as the RMG can get low priced yarn from other countries due to the change in rules of origin. Moreover, the local spinners will not be able to take the advantage of reduced raw material (Cotton) cost instantly as they had bought cotton at higher prices last year. Therefore, this will cause the followings: Sales revenue (quantity & price both will be affected) will decline for most of the spinners unless they have their own forward linkages. Have to sell the existing inventory below their cost price as they had purchased cotton during the time of rising price. The above issues will surely cut down the profit margin of this sector (Makson, Malek & Metro Spinning Mills Limited). However, this loss of profit for the Bangladesh textile mills could be for short-term period.

A Special Notification: The main ingredient of Acrylic yarn is Oil, therefore; it is unrelated to natural cotton price movement and more related to oil price movement. As a result, Acrylic yarn producers (R.N.Spinning Mills) are less likely to suffer from low cost yarn supply from other countries (India, China) as unlike natural cotton India and China has to import the main ingredients of Acrylic yarn i.e. Oil.

Considering the above issues Acrylic yarn producer will maintain their growth prospect as well as profit margin. The only threat to this sector is the low capacity of production.

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The new rules of origin- Good news for the RMG but will it be the same for the Primary Textile Sector (PTS)

The European Unions decision to abolish two-certificate system and go for only one certification of fabric to garments, would certainly increase the exports of Bangladesh in general and that of RMG in particular considerably. Therefore, there appear bright chances for Bangladesh to avail these opportunities and achieve the export target of US $20 billion through exports of garments and some textile products in FY 2010-11. It is to be mentioned that garment exports claim share of about 80 % of Bangladeshs total exports. It is worth mentioning that US and European Union countries are main destinations for Bangladesh garment exports claiming some 80 % Under the new GSP share.
rules, effective from January 1, exporters will get zero-duty facility even if the products are made from imported fabrics.

But our Primary Textile Sector now have to face some hard challenges as under the previous rule the garment makers are required to buy bulk of their fabrics from Bangladeshi textile plants in order to enjoy zero-tariff benefit in the EU. Now under the new rule the RMG sector can from outside the country to meet their demand at a competitive price and again enjoy the duty free access to the EU. Under the new GSP rules, effective from January 1, exporters will get zero-duty facility even if the products are made from imported fabrics. Previously, the exporters used to get this benefit if only local fabrics were used. As per the new notification of EU regarding change of rules or origin, Bangladesh can export duty free to EU even if only stage of processing (i.e. garment making in case of apparel) has happened in that country. Consequently, Bangladesh will be able to import fabrics from any country in the world and export apparel duty free to the EU. Who is going to benefit?
i. Apparel Exporters in LDCs: The main winners of this change would be the

garment exporters in Bangladesh as with the effect of the new one-stage rules of origin, the country's 100 per cent apparel exports to EU, Norway, Switzerland and Turkey are now availing the GSP benefit, earlier only 42.72 per cent of the woven-wear textiles could benefit from the GSP system.
ii. Fabric Exporters in nearby countries: Fabric exporters to Bangladesh from

countries like India, Pakistan, China, Thailand, and Indonesia would be greatly benefitted as currently they are at a disadvantageous position against the local mills in Bangladesh who enjoy easy sales due to the GSP benefit that is received by garment exporters using their fabrics.

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Who can be the losers?

i.

Bangladesh textile mills (Spinning & Fabric): The textile millers can be the biggest loser as it loses its main advantage i.e. the GSP benefit. It will now have to compete with the strong textile industry in India, Pakistan, China and other countries in the open market. To take an example, currently most denim mills in Bangladesh enjoy a sold out position and some mills do not actually have a marketing department! This situation is likely to change. The Prevoius GSP Policy which requires a two-stage transformation for clothing export facilitated Bangladesh to build up and invest heavily (Euro 4.00 bn) into the backward linkage textile industry. Investments made in the backward linkage industry are large investments and based on a particular condition. Therefore, any change in the existing Rules of Origin may have negative impact on this investment such as leading to closure of mills and increase redundancy in employment, set backing poverty alleviation programmed and discouraging potential investors and mills in the pipe line. It is certainly true that the backward-linkage industries in Bangladesh will face new competition from foreign suppliers of inputs for the country's export sector.

In this current situation, the Primary Textile Sector (PTS) of Bangladesh can continue to flourish if they can accomplish the followings:i.

To remain in the competition they have to set a competitive price which is now very higher. Again, to remain competitive in the global market Textile millers have to use their full production capacity (right now, at least 30 percent of their production capacity remains idle because of the energy crunch). If the millers cannot use the full production capacity, they will fail to deliver the goods in time, which will encourage the garment manufacturers to import the raw materials.

ii.

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Risk Factors of the sectors

As a policy driven industry, this industry consists of several risks: Cheap Indian Yarn:

Indian yarn that is low-priced in comparison to local yarn may seize noteworthy market share local spinners, because of what local spinners will face a situation of unsold goods or may have to sell below their cost price. Higher bank rate:

Higher bank rate to obtain loan may create serious trouble to the local spinners. On the other hand, their main competitor, India enjoys a moderate rate of only 5% to obtain the loan. Gas & energy crisis:

Again, to remain competitive in the global market Textile millers have to use their full production capacity (right now, at least 30 percent of their production capacity remains idle because of the energy crunch). If the millers cannot use the full production capacity, they will fail to deliver the goods in time, which will encourage the garment manufacturers to import the raw materials. Low cash incentives:

Government grant 10% cash incentives on export of fabric produced locally from local yarn. To remain in the competition after the change of GSP rule of origin it should be higher. Growing foreign competition:

GSP facilities which remained as a safeguard for industry, has been withdrawn recently. The decision has hit hard the industry as now local RMG producers can import their required raw-materials from outside the country.

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8 Risk Tying Regional spinning Scenario to Bangladesh/ Contributing factors to Success for Different Countries A Close Look at India, Pakistan and China: Comparing Bangladesh with other countries China: Contributing factors to Success Labor - Per-unit labor costs very low due to low wages and high productivity, but now rising. Inputs Local production of cotton used to make yarn and apparel and made-up textile articles. Business climate Rising labor costs, local currency revaluation vis--vis USD, workers unwilling to migrate to southern production zones, rising local demands are some of the current issues facing Chinese manufacturers. India: Contributing factors to Success Labor - Huge, relatively inexpensive, skilled workforce; has design expertise. Inputs -One of the worlds largest producers of cotton. Business climate - Personal safety, security of shipments between factories and ports and bureaucratic red tape and infrastructure are issues with many US firms using agents in lieu of dealing directly with producers. Pakistan: Contributing factors to Success Labor - Large, relatively inexpensive labor supply. Inputs - Access to local supplies of raw cotton, woven and knit fabrics. Business climate High bank rate, gas and electricity crisis, flood are some of the current issues facing Chinese manufacturers.

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9.

Concluding Remark

From the above it is obvious that the new rules of origin as well as the decreasing trend of cotton price will increase the cost of textile millers & cut down their profit margin (competitive price, use of diesel oil to use their full capacity due to the energy crunch, marketing cost). Therefore, this year the profitability of this sector may slow down. However, this setback for the Bangladesh textile mills could be temporary. Over time, it would help the industry to upgrade itself and compete with the best in the world. In any case, they will continue to enjoy macro level support and incentive from govt. Besides, importing the raw materials by the RMG sector is expensive due to import duty, tax (Advance Income Tax) etc. as well as higher lead-time of import, which may allow PTS to compete with foreign suppliers.

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