Entangled yarn: egypt textiles industry faces crisis

Hit with the soaring price of raw materials, unstable industry conditions, and threatened with a drop in demand, the garments business is bracing for the worst

"I buy every piece of clothing at a 30-60 per cent higher price in comparison to last year," said Tamer Mohamed, a clothing store owner. Mohamed, like all clothing retailers across the world, is faced this summer with an unprecedented 300 per cent increase in raw cotton prices.
"Some clothing prices went up by 100 per cent," said Mahmoud El-Daour, head of the garments division at the Cairo Chamber of Commerce, who added that the main reason behind the soaring prices is the shortage in the supply of cotton, a basic raw material for textile products, constituting 60-70 per cent of garments, due to smaller harvests.
A kantar of raw cotton, which equals 50 kilogrammes, in this year's harvest cost LE2,300, while the price of a kantar in December 2009 was LE580, said El-Daour. The shortage of supply for local textile factories, he added, happened because a large portion of locally produced cotton harvested in August and September will be exported according to already signed contracts.
Another important reason for the shortage, El-Daour explained, is the floods that destroyed a lot of this year's cotton crop in India and Pakistan, two of the largest exporters. These two countries have decided to halt any export deals for this year. Moreover, some countries like Syria have decided to cancel export contracts this year due to fears over a possible decrease in the harvest because of unstable weather conditions. Egypt imports 3.5 million kantars of raw cotton annually.
Additionally, "in 2008, the price of a kantar of cotton was roughly LE480, and was considerably low for Egyptian cultivators, leading many of switch to other crops," El-Daour noted. He added that this lead to a drop in the cotton harvest.
During a recent meeting between Egypt's minister of trade and industry, minister of manpower, minister of agriculture and a number of representatives of various textile entities across the country, some suggestions were so as to save the industry from collapse. The suggestions included sending a formal request to the prime minister, Essam Sharaf, to issue a decree that will stop exporting locally produced raw cotton in order to control prices, as well as determining a price ceiling for yarn, including cotton yarn.
"If the government decided to stop exports of raw cotton and cancel already signed export deals, Egyptian cotton exporters would suffer huge losses," says Mofreh El-Beltagui, financial and management secretary of the Cotton Exporters Union. "There are contracts signed already between Egyptian cotton exporters and buyers from various countries. Exporters will have to pay buyers enormous amounts of money if they cancel the deals, according to penalty clauses in the contracts," he explained.
There are 800,000 kantars of raw cotton ready to be exported in addition to another 200,000 waiting for export deals. The one million kantars are worth LE1.7 billion, and El-Beltagui wonders if the government will buy them from exporters if they impose the ban. "Besides, exporters will lose outside markets for years if they fail to deliver this year," he said.
El-Beltagui pointed out another negative consequence that will result from a ban on exports. The new prices benefited local farmers for the first time in years after they complained about low profits. "In response to the higher prices of raw cotton, farmers decided to cultivate half a million feddans —which will produce about four million kantars —this year instead of 316,000 in 2010," he said, adding that local factories will not be able to process all that quantity.
El-Beltagui suggests that instead of banning cotton exports, the government identify the needed quantities of locally produced cotton for local factories, and buy them from farmers at international prices.
"The problem now is not in higher prices, it is the inability to provide textile factories with the needed quantities of raw cotton," says Mohsen El-Gilani, president of the Textiles and Spinning Holding Company, adding that local production of long-staple cotton cannot be used by the majority of yarn factories in Egypt. "In addition, countries refuse immediate export deals, preferring the future contracts system," he added.
El-Gilani underlined that many textiles and spinning companies have to work at half their production capacity due to supply shortages, to the point that some factories have laid off workers to cope with resulting losses.
"Factories are suffering from almost a 30 per cent drop in the quantities of sales," El-Gilani stated. However, he added, export deals, if they are completed, will make up for some of the losses.
"Clients in Europe understand the excessive increases in prices, unlike Egyptian customers," he noted. Egypt's exports of raw cotton in 2009-2010 reached $200 million. El-Gilani also said that the repercussions of the 25 January Revolution are still affecting the sector. "The demands of some workers are not helping production either. Legitimate demands will be met, but everything will be done according to a timeline," he stated.
The Egyptian customer is very sensitive to price hikes and that puts the whole garments business this season in jeopardy. "The purchasing power of people these days is lower as they have other priorities," El-Daour said, adding that the majority now think of securing their food needs and to save money for an uncertain future amid instability on the political front.
El-Daour believes that the upcoming harvest of August will not bring down international prices of raw cotton, but will help stabilise the market.