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Pakistani Mills Face Cuts

The country?s recent 31 percent currency devaluation has given a breather to mills.

Shahkam Textiles manufactures goods for Macy’s, Puma and Nike.
Appeared In
Special Issue
WWD Sourcing Horizons issue 09/16/2008

LAHORE, Pakistan — Given the rising costs, global recession and the prevailing thin margins of Pakistani mills, the country’s recent 31 percent currency devaluation has given a breather to mills.

But if prices don’t soon start creeping up, many more of them will be forced to shut down, further reducing the capacity of this major textile exporting country, executives said.

The trend is for lower volume, but slightly higher prices, said Shahid Butt, chief executive officer of Shahkam Textiles, based here. Shahkam is Pakistan’s largest composite vertical knitwear facility with a capacity of 60,000 dozen a month. Its clients include retailers such as Macy’s Inc., sportswear brands like Puma and Nike and urbanwear buyers such as Phat Farm.

“There is a marginal increase in global prices, where earlier there was a 2 to 3 percent decrease, so the trend has reversed,” Butt said. “With the appreciation of the Indian rupee in the 2007-2008 fiscal year and inflation in China, Pakistani vendors have gotten the added advantage of the devaluation of the Pak rupee compensating for the higher input cost so were able to maintain the current low product price,” Butt said.

In Pakistan, the government devalued the currency by as much as 24 percent since the beginning of this year to save exports and to temporarily absorb a 30 to 35 percent input cost increase.

“Unfortunately, inflation will catch up with the devaluation in the next two to three months,” Butt said. “Just the price of yarn, which makes up 60 percent of the cost of production, has risen 25 percent in the last six months. There is a transportation strike in Karachi since mid-August as the higher price of oil is hurting truckers.”

The government has just this month increased power tariff rates by 31 percent for the state-run electrical company.

“At this time, mills have stopped large-scale investment and importers don’t want to carry very large inventories,” Butt said. “Some mills have even decreased their capacities and their revenue has been lowered, but the upside is that there is greater efficiency and the hidden cost of wastage has gone down. Shahkam has laid off 110 workers and is consolidating itself presently.”

Naveena Group, with mills here and in Karachi, recently shut down its knitwear unit, but is continuing with its denim and woven divisions. Naveena had been exporting knitted garments to brands such as Target prior to this.

Naveena director Asif Riaz stated that one reason was that, in the knit division, the firm was dealing with American buyers who were not willing to go against the travel advisory and come to Pakistan, whereas in the wovens division, it is dealing primarily with Europeans who don’t have any such issues. Even if American importers did come, he said, they wanted to buy cheaply, which was not feasible anymore.

In November, Irfan Textile Unit 1, based here, shut down its Irfan Unit 2, but since then 50 percent of its capacity has been added to Unit 1. Irfan Textile provides polo shirts and T-shirts for various divisions of Gap Inc.

Director Jawad Irfan said, “The price of Pakistani garments has not risen in six months, thanks to its rupee devaluation, but Chinese and Indian manufacturers are refusing orders at the current price. Pakistani mills working under capacity are accepting these orders at the low prices, but that cannot continue indefinitely.”

With high oil prices and global inflation, the cost is accelerating at an alarming rate. Whereas in 2007, the Pakistani wage increase was 15 percent, this year it is already 30 percent and even then it’s not at par with the increase in cost of living index. The cost of commodities has gone up and food prices have almost doubled.

Furthermore, Pakistan’s government announced last month that it will be capping this year’s fuel bill subsidy at $2 billion, after which the industry is on it’s own.

In Bangladesh, which has the cheapest labor available in the region, the government is subsidizing mills to provide commodity items like rice to workers to delay an increase in the minimum wage. It also offers lower interest rates and gives incentives to use local raw materials to mills.

However, when the living rate and minimum wage grow further apart, then if there is a spark, riots can erupt, like two years ago in Bangladesh when several factories got burned down over the minimum wage issue.

Similarly, in July, at least seven workers were shot in Faisalabad, Pakistan, when gunmen allegedly hired by factory owners opened fire on textile workers demonstrating for higher wages. One of the Kamal Textile Mills units in Faisalabad also was reported to have been burned down by protesters due to labor unrest. The minimum wage here has gone up to $91 a month from $61, and some of the factory owners were dragging their feet in complying with this raise.