Goal 2020, surviving cotton: a roller-coaster decade for raw materials
Cotton, one of the main raw materials of the fashion industry, reached record highs in 2011 and again hit lows just three years later.
The global raw materials market has lived one of its busiest decades. Cotton, one of the main raw materials of the fashion industry, reached record highs in 2011 and again hit lows just three years later. The lesson that retailers took from these was that it is necessary to stabilize raw materials market and give it continuity over time. Part of the answer to this shift of paradigm is circularity.
Between 2010 and 2011, cotton was up the clouds. That year, prices of this raw material exceeded its historical highs, unbeaten since 1995. It was the spring of polyester and viscose: retailers designed collections based on these raw materials to help its margins before the rise of cotton prices.
Between December 2009 and the same month of 2010, the price of cotton increased by 140%. That increase drove up the prices of other raw materials. Wool increased its value by 40% in one year; silk, 100%; linen, another 40%, while manmade fibers increased it between 30% and 35%.
There was no specific cause explaining that escalation, but rather a set of events that pushed up its market value. Bad harvests in Pakistan, one of the cotton-producing countries, due to heavy rains that caused significant flooding in the country was perhaps the trigger.
Another reason that drove this inflation was the increase in the demand of textiles from countries such as India, China or Brazil, emerging economies that at that time were in full swing from their middle class and an internal consumer market. In this sense, India, then the world’s second largest producer of this raw material, aggravated the crisis by restricting cotton exports to protect its textile industry.
The Asian country went from placing 1.4 million tons of cotton to 950,000 tons in the foreign market. This measure led several international organizations to raise their voice against the situation such as the American National Council of Textile Organizations (Ncto), Eurocotton, Istanbul Textile and Apparel Exporters (Itkib, in its acronym in Turkish) or Canaintex. Several governments also fought against this measure before the World Trade Organization (WTO).
China also stepped forward to defend against a shortage of product in the domestic market and initiated a policy of accumulating stocks intensively. Finally, at the beginning of 2011 India put an end to its restrictions on cotton exports, but the Asian giant kept its surplus retention strategy in place during the following years.
In March 2011, the price of cotton registered its highest rise, up 167.8% compared to the same month of the previous year, to reach the historical level of 229.7 cents per pound. In April 2011, prices began a new moderation period, with an interannual drop of 5.7%. The fall in demand and India’s decision to remove export limitations on this raw material caused prices to decrease in following months as quickly as they had increased.
This excessive increase had a direct impact on the margins of fashion companies and, especially, those linked to cotton, such as those specialized in denim. The shock wave of that rise in cotton reached the stock market values of the fashion giants, impacting especially negatively on the fashion retailers immersed in the price war.
In March 2011, the price of cotton registered its highest rise, up 167.8%
The turbulence in the price of this raw material continued to hit retailers in the stock market, which in their results strived to point out their new strategies in diversification of raw materials to reduce dependence on cotton. H&M, for example, ended 2011 with a 15% drop in its net profit. In its annual report, the company explained: “It has been a very complicated year in the markets where we provide ourselves, where the increase in prices, mainly as a result of the rise in cotton, has led to an increase in purchase prices.”
Gap, on the other hand, shrunk the net income of that year by 17%; Benetton, that year began the procedures to go private that year, went from earning 120 million euros in 2010 to seventy million euros in 2011, while Abercrombie&Fitch sank its net profit by 15%.
Accumulation of inventory and falling prices
The consequences of that price escalation persisted in the following years. Uncertainty in the world cotton market was then generated by China. The Asian giant, which had initiated an inventory accumulation policy to protect its local textile industry, again distorted its price. The country also increased its imports to increase its reserves. In 2012, the US Ministry of Agriculture already warned that the global stock of this raw material would reach its highest value at the end of the year in 25 years by Chinese policy.
In fact, India came to block its cotton exports for the second time due to the voracity of China’s purchases and the fear of leaving the local textile industry out of supply. The massive accumulation of cotton by the Beijing Government made it the owner of a quarter of the world’s reserves, which accounted for the equivalent of 60% of annual consumption.
India blocked its cotton exports for the second time due to the voracity of China’s acquisitions in 2013
This accumulation of stocks alerted the sector that was contemplating the possible sale of these reserves, which would curb international trade in this raw material and stir its value again. Cotton, unlike other raw materials, has an expiration date and, the longer it is used, the more likely it is to be spoiled. Professionals in this field began to glimpse a new era of low prices.
Evolution of the price of cotton in the last decade
At the end of 2013, China began to release its cotton inventory and, in 2014, ended its policy of swelling its reserves. The volume that the Asian country accumulated became such that it was sufficient to supply the entire Chinese textile industry for more than a year.
At that time, the country already had more than half of the world’s total cotton reserves. The consequence of this new scenario was a sharp drop in production and a break in international trade. Another element that helped to push down the price of cotton was polyester, the synthetic fiber derived from the most abundant and economical oil, which was gaining prominence in fashion collections.
The next twist to the global cotton market was given again by China by increasing import tariffs
The next twist to the global cotton market was returned to China by increasing import tariffs to protect its cotton and introducing additional quotas. Stock accumulation policy and local production subsidies had pushed prices up, favoring cheaper and higher quality cotton imports. However, the measure was not enough to maintain local production and, in 2014, India took away the leadership as the world's leading producer of this raw material.
Sustainable cotton and other raw materials
In parallel to the roller coaster lived in the traditional cotton market, sustainable cotton began to gain strength in 2010. That year, worldwide sales from sustainable crops of this raw material reached 5.2 billion dollars, according to the Textile Exchange. A year later, sustainable cotton business generated 6.2 billion dollars. For the first time, fashion distribution giants were betting strongly on this type of cotton. In 2011, the main consumers of sustainable cotton on the planet were already H&M, C&A, Nike, Inditex and Adidas.
The next twist to the global cotton market was given again by China by increasing import tariffs
The largest manufacturers of synthetic fibers
As of 2015, fashion giants began to look for synergies to speed up in this regard. Kering and H&M acquired a stake in British startup Worn Again to accelerate the development of their technology for textile recycling and circularity. In fact, the trigger for textile research and innovation in the field of raw materials has taken a radical turn.
In a first phase, all the development in smart fabrics, conductive threads and technology applied to textile was paralyzed to overturn it in the search for new substitutes for natural and synthetic raw materials. However, in 2016 and 2017, sustainability addressed a second stage: circularity. The large distribution embraced this new system of the economy to reduce dependence on raw materials from natural crops and those derived from oil. Thus, in 2017, about 19% of the cotton used in the textile industry came from sustainable sources.
In the case of polyester, 14% that went to the sector was already recycled, and in viscose, 4.5% was lyocell, the most sustainable version in the production of cellulose textile fibers, according to a study by Textiles Exchange. Regarding polyester, the queen fiber of the fashion industry, in 2017 it reached a record production of 53 million metric tons. Of these, 7.42 metric tons were already made of recycled polyester. The bulk of this type of fiber comes from plastic bottles and the polyester itself for textile use.
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The Manufacturing Matrix in Pakistan
Option 1 - The Pre-Requisite
Captive Raw Materials - For Captive Raw Materials in the Agri and Mining Sector,the State has to support the complete value addition of the product,near the source.These 2 cordinates,combined with Tax Holidays,will make it a viable venture,for any Foreign Capitalist - subject to Politiical Risk.Take the Sugar sector - for Political Risk - and so, only Pakistani Politicans,can set up Sugar Mills.
However, one needs to be practical here. Just because Pakistan has the best Cotton in the world (along with long staples, from Egypt),does not mean that yarn or fabric units, will be viable in Pakistan. Large Technologies of Scale, allow imported raw material from the Moon (like Helium),and still be viable. So there is no harm in exporting the cotton or some minerals. If the same technologies of scale, were set up in Pakistan - it will involve large capital costs - and would accentuate the financial and political risk,of the project. And if it sinks,it will doom the Pakistani Banks (like in India).dindooohindoo
Pakistani Capital should be used where Pakistani has an exceptional edge,like in the Cement Sector (with complete maaterial and logistics integration).Another example is the Agri Processing,Foos and Agri Waste Insustry.These also provide large scale employment,as they have extensive supply and value chains.
Option 2 - Strategic Leverage
Some Manufacturing is required as a strategic leverage,to ensure that Pakistan is not coerced, in pricing,in international procurements.Therefore,there have to be sufficient capacities,in some critical sectors,like steel,oil,food,fertilisers etc. Howvever, this is an offset,to procurement price risk.If there is a Force Majeure event or a Trade embargo - then,there will be no raw material imports,in any case - and the fertiliser plants etc,will be mothballed.
Option 3 - Manufacturing Hydrogen for the Balloons
So let us say,you have floated a billion balloons,by importing hydrogen - and now, the balloons are used,for entertainment,space travel and advertisements. Next Step,is to manufacture the Hydrogen.Just like Pakistan,is sponsoring the manufacture of mobile phones and accessories,in Pakistan to STOP their imports,as it is a waste of USD and much cheaper to make.Just like the Auto sector,it is an assembly operation - and so,the capacities are modular for the phones and their parts.At any stage,of the manufacturing, any process can be outsourced to PRC,at any time,by IMPORTING the interemediate products.
Thus,there is large scale employment - with impact on entrepreneurship and tax revenues and FX savings and reduction in economic costs.
The Crux is to LET THE PRIVATE SECTOR EXPAND THE BALLON (THE MARKET).LET THEM USE ANY MEANS (SMUGGLING ETC.). Then when the supply chain,logistics,servicing, spares,maintenance,skilled and unskilled labour value chain,is in place - BRING IN MANUFACTURING OF THE PRODUCT.
Option 4- Manufacturing to Stop Smuggling
There are several imports into Pakistan where the market is highly matured and seasoned.No one likes to pay import duty.The Philosophy is,that the importer has spent time and money to locate and hide the supplier,and is giving JOY to 200 million people,by selling cheaper and attractive products.If you travel to Yiwu or Guangzhou, you will find Pakistanis relabelling their cargos (to be shipped),so that competition CANNOT trace the supplier.They stuff the container far away from the port - drive it to the port - seal the container - and then,track it on GPS sites ! There is a large group of the Pakistani traders - as they carry large amounts of cash (which has to be stored and guarded) - as the suppliers are paid in cash - and since, there is no insurance or underinsurance, there is a lot of tension in the supply chain.
So Y Should they pay Import Duty ?
However,after the market in Pakistan,is seasoned and matured - the Pakistani state should ban imports,and allow manufacturing.The same importers can bring in the Chinese,as a JV into Pakistan.For FMCG and Consumer Goods,like Toys,Stationery etc.,all the raw materials, which are used in PRC,are available in Pakistan.Labour Cost in China is 10 times that of Pakistan.It is simple Maths
But the real gain is that - IT WILL BOOST GOVTT REVENUE.As the manufacture will leave a forensic trail,from power meters to pollution,and so,the state will earn large revenues which were lost before,and also save FX.
Option 5 - Manufacturing Intermediation
If you look at the state of pollution and effluents, in Karachi - it is a BAD and SAD situation. However, that is what has led to the COVID immunity in Pakistan. So the Good news just does not end.But this poisoning of the air,water,food,fish and meats - will take an incalculable toll on the intellectual,spiritual, social, sexual and physical evolution of Pakistanis.
Therefore,it is time to OUTSOURCE pollution,using Manufacturing Intermediation,by carrying out Manufacturing from Intermediates.Hence,Pakistani manufacturing should use imported intermnediate products - wherein,all the poison,effluents and pollution,are in the exporting nation.PRC has the effluent treatment and waste recovery plants and dump sites on a scale,cost and technology,WHICH NO NATION IN THE WORLD HAS (not even the USA - as the USA,imposes a TAX,on storage of Hazardous Cargos).Of course,then COVID breaks out - but then,the PRC export it,and recover all the costs,of the effluent treatment.
Option 6 - The Ponzi Manufacturing Model
Robbing Peter to Pay Paul,is the Principle of Collaborative Capitalism - because,Humans have to be occupied - mentally and physically.Else you have chaos,anarchy and revolution.
Country A has to produce a Product X,although the said product,can be imported at 2/3rd the cost,in Country A (excl importing duty).Hence,The nationals of Country A,have to pay Billions of USD EXTRA,to consume Product X,made in Nation A,since the factories which produce X,in nation A,employ millions of nationals of nation A.This is Ponzi Manufacturing,like we have in India - and which has doomed,the entire Indian Banking system.
As time passes,nation A which is a Bogus nation - like India,as a part of its strategic politics,will ally with the US and EU etc., and will have to drop tarriffs and non tarriff barriers.Then the imported substitutes of X,will storm the market and wipe out,the local factories.
Y ? Simple ! The nationals of nation A,will ask 1 question ! Y should be pay more ? End of Ramayana - Part 1 !
There is 1 more Ponzi Angulature.A Bank - B,gives project loans to the factory,which makes X.Then the factory finds a banker - C,to give the working capital loans to the factory.After some time,Banker D comes in,and gives loans to the staff of the Factory,which makes Product X for cars,homes etc..After some more time,Banker E comes in,to give consumer credit,to the buyers of Product X.After a few years,Banker F to Z,give project and working capital loans, to the auto,real estate,cell phone companies,whose products were sold to the staff,of the factory of Product X (whose staff loans were funded by Bank D).This is the multiplier effect,of the Ponzi Model.After some time, Bank A which gave the term loan to the factory,which makes Prouct X,targets the borrowers of Bank B,C,D and E and the employees of the borrowers.After 5 years,the factory which makes Product X,goes bust - and then,all the Banks from A to E,using the profits that they earned,from the No Brain Credit spreads - do a CDR/OTS,and fund a NEW ENTREPRENEUR,To take over the factory,which makes Product X.
The only fools who DO NOT GET THE CDR,are the fools working for the factory,which made product X - and who TOOK Consumer loans for cars,houses etc.- and the fools,who took bank loans,to finance the purchase,of Product X.But the biggest fools,are those who put their cash,in the banks,as depositors.
Pakistan also needs this Ponzi model,as it HAS To employ,the millions of urban and rural folk. Therefore, selection of the industry is critical,and the
Economic Costs are to be considered.Focus has to be on SME (so that capital,political and Technological risk,is,as low as possible) and labour intensity and medium technology and medium power consumption - such as imports on CKD/SKD form,and/or last point of manufacturing,packaging and re-packaging etc.
In the next stage,comes in all the items of daily consumption.As an example,if a person wants to buy a T-Shirt,there is no need to set up a yarn,textile,fabric and garment unit,in Pakistan.Just Import it - and the downstream retail,will employ 10s of 1000s of people.But for some applications,like school bags or uniforms - you can just import the fabric - and then the SME take over.Like this, there will several fool proof Ponzi Models - which will ensure the minimal loss - even in a doomsday scenario.
Option 7 - Decentralised SME manufacturing
Transportation is a dead loss and an economic loss.Suppose you transport a raw material from Torkham,to a place near Karachi,to make a Product Z,and then transport it back,to near Torkham to sell it to dealers - then you have a disaster of freight.The only happy person,is the transporter and the transportation supply and value chain. Therefore, Pakistan needs SME manufacturing near Point of Sale of end product,with labour intensive operations,and a combo of Entry Tax and 1st Point/Last point Tax,to ensure that the market of the SME,in a 100 kms radius,is protected.The Incremental NSR for the SME,due to savings of freight,will offset the probable higher manufacturing costs,of SME - which can also be offset by labour intensity of operations.
Volumetric cargo transportation,is a disaster for a nation,in terms of economic value.The happiness is only for the transporter as he charges the same freight as for a Bulk Cargo - but his fuel and operating costs,are lower.In a nation like Pakistan - freighting should be expended,on metric cargos
Option 8 - Cash Based Manufacturing
Pakistan should NEVER make the BLUNDER of the CHAIWALA's Notebandi.This clown has destroyed the unorganised manufacturing forever.Notebandi + GST + COVID Lockdown ! The CASH MODEL of manufacturing is a REALITY OF LIFE in the whole of Asia - including Nippon.It is a legitimate FORM OF COST REDUCTION.A person who buys a car
does not get any VAT or IT offset on the taxes paid.If he could buy the same car free of taxes and lose out on some benefits like scope of insurance - he would
take it ! There are many people who will NOT buy a car WITH TAXES.
To make a car w/o taxes,you need steel free of VAT.For that,you need to do your purchases,and all costs,in CASH.You need to borrow in cash.And that credit comes from BLACK money operators,and the CREDIT COST IS,in many cases,less than half the bank cost - and has PERFECT SENTIENT no asset collateral.You do not pay - you die !
If Taxes on a box of chocolates is,say 25%,then the cash producer,can sell it at,less than half of the branded price,as he has NO TAX,across the supply chain,NO PF/ESI and most importantly - No Advertisement costs and ultra low finance costs.It is a manufacturing model for a CERTAIN CLASS OF PEOPLE,AS USERS AND WORKERS.
And this sector,employs billions across the world - who would,otherwise just die ! And that is what the Chaiwala has killed,and COVID has incinerated,the dead body.
Pakistan should NOT make that mistake.