By  on November 4, 2008

LAHORE, Pakistan — Electricity and natural gas shortages in Pakistan, coupled with higher prices, have left the nation’s textile industry struggling to cope during the global economic downturn.

“Twelve hour per day country-wide power outages have affected our cotton textile industry badly,” said Amer Hameed, director of operations at Masood Textile in Faisalabad. “The first 25 days of October, the country was in a deep energy crisis for both electricity that the state provides us and natural gas that we use for our mill’s own power generating unit. We, therefore, had no option but to use diesel for our in-house power generation. Not only has the electricity cost gone up by 60 percent, but it costs us four to five times its price to run our generators on diesel. We usually run these on natural gas, but this was also not available to us at this time.”

Hameed said the mill had to absorb the extra 18 percent monthly cost of using diesel generators to ensure it delivered orders on time. “Though the government has announced a 40 percent decrease in electricity charges to consumers after nationwide public demonstrations, it cannot sustain the subsidy for long,” he added. “The situation has marginally improved for us as regular gas supply has been resumed, but we are expecting seasonal gas shortages from December to February again.”

Samir Saigol, the All Pakistan Textile Mills Association representative on the special committee formed by the government to recommend downward revisions in prices for all electricity consumers, said, “Energy is the single most focused on cost in Pakistan textiles today. It is the highest cost component after raw materials for APTMA [spinning and weaving mills], accounting for approximately 12 to 14 percent of turnover, and 30 to 40 percent of conversion cost, excluding raw materials. In addition, there is an energy shortfall of about 5,000 megawatts in the country.”

Approximately 60 to 70 percent of Pakistan’s spinning and weaving sector runs on gas-based power. Gas prices were revised upward by 30 percent in July, and another 30 percent rise is set for December, but there is stiff resistance against further increases due to declining oil prices and questions about the industry’s viability at these gas price levels, Saigol said.

Apart from prices, the other big issue is gas shortages during the winter months, he added.Last year, APTMA members went without gas for about 45 days during the winter. The winter shortages are expected to worsen this year due to sharp increases in demand from both residential and industrial users.

The scenario on the electricity front is perhaps worse.Electricity rates for industry were revised upward by 25 percent last March (with an overall increase for both domestic and industrial users of 10 percent), and a further 50 percent increase has been proposed for industry, or an overall increaseof 31 percent, said Saigol.

Hameed said Masood Textile, being a large mill, could sustain the losses incurred from increased energy costs by arranging extra working capital from banks. He said the recent 30 percent devaluation of the rupee against the U.S. dollar, as well as October’s drop in the price of raw cotton by nearly a third (it has now stabilized), helped compensate for the increases in costs for power, wages, and raw materials, as well as the overall inflation that has bubbled up in Pakistan’s economy. As a result, though, there is no saving from the rupee’s devaluation that the mills can pass on to export customers.

Masood Textile manufactures sportswear, loungewear and underwear for J.C. Penney Co. Inc., Wal-Mart Stores Inc., Macy’s Inc., Kohl’s Corp., Sara Lee Corp., Abercrombie & Fitch Co. and Fruit of the Loom Inc.

“Importers have informed us that they are expecting a 7 to 8 percent decline in sales and since they will already have leftover stock on hand from their last orders, they want to curtail their booked orders by 8 to 10 percent,” Hameed said. “They are looking for any excuse to do that. What we are offering them now is a better product for the same price; for example, instead of a simple polo shirt, we are now preparing to give extra garment washes or more applications. This way at least the mill’s overheads can be covered. “

Active Apparel International, with mills in Lahore and Multan, has the country’s biggest fabric knitting plant and operates one of the largest dye houses. General manager for marketing Imran Iqbal said, “We have a backup power generation plant installed with ample capacity on each location so that the electricity problem doesn’t hurt our delivery commitments to our U.S. customers. However, our costs go up by 100 percent when we get power from self-generation. Due to the rupee devaluation, we were compensated for this and so far it hasn’t hurt our bottom line.”

Active Apparel’s U.S. customer base includes Aéropostale Inc., Sears Holdings Corp., VF Corp., Enyce, J.C. Penney, Wal-Mart, Nautica, Russell, and Perry Ellis International Inc. Active Apparel’s total export capacity is about two million garments a month.

“When it comes to the winter months in Pakistan,” said Iqbal, “we usually face natural gas load shedding, which really hurts our dye house processing operation based on natural gas. Moreover, we have to spend three times extra for furnace oil, the price of which skyrockets during the period of high demand. Natural gas shortages means losing from our bottom line.

“General inflation, and [higher] minimum wages have increased our cost of operations enormously. Business would have been totally unviable had it been the same U.S. dollar to rupee exchange rate as it was in June,” said Iqbal. “[But] since India also went for the Indian rupee depreciation, we are facing immense competition.”

Saigol agreed. “The 30 percent depreciation of the Pakistani rupee, while helpful to exporters, does have a downside. Big declines in the rupee-dollar parity encourage buyers to lower their price points for Pakistani textiles, while at the same time causing a surge in the import bill. The resultant inflation puts further pressure on input costs. In the competitive world of textiles, and in the face of a global economic meltdown, companies do not have the luxury of exporting their domestic inflation. If anything, dollar pricing will decline going forward.”

Bowing to pressures from both the International Monetary Fund and growing budget deficits, the government has to increase energy rates while reducing supply, said Saigol. This is having a devastating impact on industry. “Higher rates of energy are a serious issue, which is gravely affecting viability, but on the supply side, we cannot export what we cannot produce,” he said. “Power outages, whether gas or electricity, are crippling textiles. We are designed to operate 24/7 for 364 days of the year. It is very difficult to mitigate the cost of two months of no gas, or eight to 10 hours of daily electric power outages.”

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