FLASHNEWS:

AKD Securities Limited – AKD Daily (September 08, 2022)

Karachi, September 08, 2022 (PPI-OT): Pakistan Textile: Cotton prices soar

Local cotton prices have traded up over the past month, increasing by 24% to PkR22,506/40kg, having reached a recent high of as much as PkR24,649/40kg on Aug 27, 2022. The increase in prices was largely driven by the flood-related loss to the standing cotton crop.

Supply-side constraints in the local market following the floods have kept prices on the higher side, with an estimated 30% of annual cotton production having been lost in the aftermath of the floods.

Cotton arrival at the ginners was down by 0.25mn bales when compared to the same period last year, with 1.54mn bales having reached by Sep’22. The slump was largely driven by a shortfall in Sindh, where 0.84mn bales arrived at the ginners, lower by 0.4mn bales or 33%YoY.

The COTLOOK A Index is currently trading at USc122/lb, compared to USc104/lb on Sep 6, 2021, driven by adverse climate conditions across the globe, with India suffering from heavy rains and pest attacks, while the US has experienced a drought in its cotton-growing region.

Textile players build the majority of their inventories during the Dec quarter, and the damage to local crop may hinder local procurement. However, we expect the companies to meet this shortfall through imports. Every PkR100/40kg increase in procurement cost above our estimate would result in NML/NCL’s gross margins to dip by 32/38bps, ceteris paribus.