Friday December 09, 2022

Discounted tariff

October 02, 2022

LAHORE: Abrupt withdrawal of power subsidy for exporting industries came as a shock particularly for the spinners as the industry is globally in trouble because orders have dried up due to global recession and high yarn rates.

The government has withdrawn subsidies on electricity from October 1. The subsidy was granted to five exporting sectors of which spinners were the main beneficiary. The tariff has been enhanced by 3 cents (US) per unit to 12 cents per unit. The 30 percent increase according to industry officials would translate into an additional bill of Rs20 million per month for average mills operating on 25,000 spindles. Spinning industry in neighboring India is getting power at 7.5 cents per unit. In Bangladesh the power tariff is 9 cents. In India most of the spinning units are operating at half capacity as there are awash with yarn but there are very few buyers in the market. In northern India the yarn rates have gone below the rates of Pakistani yarn, which traditionally is much cheaper than Indian yarn. Even then the sales have not picked up.

It is not only the withdrawal of power subsidy, but many other factors are also impacting the viability of the textile exporters. It includes high cotton rates, appreciating rupee and looming global recession. It is customary that in every recession the first cut consumers make is on clothing which could be reused for longer periods.

In Pakistan there is an acute cotton shortage, and its rates are very high. The prices of yarn have not gone up. Some mills are closed and only those big players with large cotton stocks are operative. Global demand is waning. Under the current scenario it would be impossible for mills depending solely on grid power to survive. The mills operate on a mix of gas supply and grid power would have less impact as the gas tariff has not been revised. Upgraded technology mills by installing energy efficient spindles might manage better particularly if these mills operate on gas plus grid mix.

Textile millers claim that the industry has invested over $5 billion in technology in the last two years. This means a lot of capacity in the spinning has been upgraded. The investment in reality is less than half even if four years textile machinery imports are taken. According to the Pakistan Bureau of statistics Pakistan imported textile machinery worth $543 million in 2018-19, $537 million in 2019-20, $437 million in 2020-21 and $591 million in 2021-22. The cumulative textile machinery imports come to $2.41 billion. The industry is paying the price of operating on old technology.

The value-added apparel sector consumes much less power than spinners. The impact on their energy bill after withdrawal of power subsidy would be considerably less. They might be able to absorb it if the government formulated policies that assure them inputs like yarn and fabric at globally competitive rates. This sector is more worried of slowly drying orders due to global recession.

Those units having spinning, weaving, and garmenting facilities of their own would be in a better position to absorb the higher power rates. Another worry for the entire textile sector is the rapidly appreciating Pakistani rupee. If the finance minister Ishaq Dar succeeded in bringing the dollar-rupee parity to Rs 170-180 as he indicated the exporters, would see their margins going down sharply. Those exporters that passed on the benefit of devaluation to foreign buyers would find it difficult to pursue their buyer to increase the per unit rates.