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News Clips 3 August, 2013

[ Textile sector set to report robust profitability ]
[ Ministry claims unearthing Rs760m scam in TDAP ]
[ Apparel industry sees higher costs in wake of Bangladesh tragedy ]
[ Bangladesh: Desperate race to check garment factories ]
[ India: Cotton textile exports "should do better" ]

Textile sector set to report robust profitability   [ top ]

DAWN, Dilawar Hussain, August 3, 2013
KARACHI, Aug 2: As financial results reporting season gains momentum, investors in textile sector are looking forward to splendid growth in profitability, which would probably match the financial year 2013 performance.

The profitability of textile (sample firms) scaled four-fold to Rs22.8 billion in three-quarters of financial year 2013 (9MFY13) as against Rs4.4bn in the same period last year.

The upcoming results for the fourth-quarter (April-June) are thought to extend that happy trend. When the stock prices of dead and dying textile companies started to stir to life last year, leading the KSE-100 index upwards from the 12,000 level, many thought that to be an attempt by the equity dealers to trap small investors as much of the activity took place in second and third tier or ‘penny’ stocks.

But the financial figures unveiled by companies seemed to justify the jubilation.

“Last fiscal year, FY13, was one of the better years for Pakistan textile sector in terms of sales and profits which was also reflected in more than 100pc price performance of our sample listed textile firms with market capitalisation of over Rs25 million,” says Zeeshan Afzal at brokerage Topline Securities.

Though shortage of power remained the perennial problem, especially in winter, the textile companies’ jump in profits by 400pc was mainly attributed to stable cotton prices and strong regional demand.

Moreover, continuous depreciation of rupee against the dollar and cheaper financing also contributed to hefty earnings growth. With operating conditions remaining about the same, analysts expect another round of healthy corporate earnings results this season.

Moreover, GSP Plus status from European Union and slight improvement in energy situation was likely to support earnings in FY14. The textile sector has seen a favourable year as prices remained stable and floated around $80 per lb. Further, strong yarn and grey cloth demand from China coupled with depreciation in the value of rupee by 7pc also helped shore up the bottomline.

In FY13, Pakistan exported $13bn worth textile products which was up by 5.9pc in dollar terms but represented improvement by 14.7pc in local currency due to the drop in value of the rupee.

Considerable growth in exports was attributed mainly to imposition of cotton floor price in China that encouraged Chinese textile manufacturers to import more yarn and grey cloth instead of converting yarn into costly local cotton.

Resultantly, Pakistan’s yarn and grey cloth exports increased by 24pc and 10pc to $2.2bn and $2.7bn, respectively, in FY13. The latest results of the textile sector are expected to show continuous growth in export for FY14 on the back of sustained textile demand from China and substantial depreciation in local currency.

However, analysts caution that much would depend upon international cotton prices, though major volatility was unlikely to be seen in local cotton prices in FY14. The encouragement was based on estimates of Cotton Crop Assessment Committee (CCAC) which estimated Pakistan’s cotton production at 13.25million bales in FY14, slightly higher over the 13.0 million bales produced by the country in FY13.

Exports and profits of the sector could also improve due to expected Generalised System of Preferences (GSP Plus) status from EU as lower import duties would provide the country’s product competitive edge in international markets. “Further operating environment of the textile sector may see further improvement in low interest rate scenario,” analysts said, the caveat, however, being the all-important improvement in energy situation.

Ministry claims unearthing Rs760m scam in TDAP   [ top ]

DAWN, Mubarak Zeb Khan, August 1, 2013
ISLAMABAD: The ministry of commerce has found out that officials of the Trade Development Authority of Pakistan drew Rs760 million on a single day against fake claims.

The amount was drawn from a bank on April 5 when the caretaker government was in power.

The issue came to light when the ministry received complains from within the TDAP and the private sector that required formalities were not completed before the withdrawal of money.

Spokesman of the ministry Mohammad Ashraf confirmed to Dawn that the amount had been drawn on a single day. “The amount approved for disbursement in April was nearly Rs760m,” he said.

But, he added that the total disbursement included genuine claims.

The ministry, according to Mr Ashraf, ordered a departmental inquiry and the committee which carried out the probe has submitted its report.

“The committee has recommended action against the officials involved in the scam,” he said and confirmed that some TDAP officials were involved.

A source in the TDAP told Dawn that senior officials of the commerce and trade group and district management group were involved in the scam.

Earlier, a multi-billion scam was unearthed in the National Insurance Company Limited, another subsidiary of the ministry. The coalition government headed by the PPP had announced a three-year trade policy framework. The policy included proposals for providing cash subsidies to exporters to promote trade and exports during 2009-12.

It envisaged that the government would bear 50 per cent cost of rent and salary of three employees of exporters who opened their offices abroad and 50pc cost of retail outlets.

The officials allegedly involved in the scam had prepared bogus documents of several companies and also opened bank accounts in their own names. They issued cheques against claims in the name of fake companies and drew money.

The finance ministry had decided to release Rs1.27 billion for subsidies to be given to genuine exporters during 2012-13. The amount was released on March 25, nine days after the PPP government had completed its tenure.

The officials whose identity has not been revealed were posted in key positions in the TDAP by the PPP government and they continued to work after the induction of the caretaker set-up.

About 60 companies are major recipients of subsidy from the TDAP for having opened their offices and retail outlets in foreign countries, but it now appears that only three to four genuine companies benefited from the scheme. About 50pc of the amount is believed to have been claimed in the name of fake companies as air freight subsidy for seafood exports.

Although the amount projected for 2009-12 was Rs26bn, the finance ministry released only Rs4.27bn in three years. An amount of Rs1bn was released in 2010-11 and Rs2bn in 2011-12.

Apparel industry sees higher costs in wake of Bangladesh tragedy   [ top ]

MARKET WATCH, Andria Cheng, July 31, 2013
The aftermath of the April garment factory collapse in Bangladesh that killed more than 1,100 has apparel executives eying higher clothing costs next year.

Apparel unit costs look to increase at a low-single-digit rate next year, after a decline since 2012, according to a Cowen & Co. survey of 15 executives and agents that handle apparel sourcing for retailers and brand manufacturers. More than two-thirds of the survey respondents see higher apparel costs next year, with 20% of them expecting costs to even increase at a high-single-digit rate.

Rising labor costs, led by China’s 61% compounded increase the past three years, was cited by 56% of respondents as the biggest headwind for apparel sourcing. However, 33% of the executives surveyed cited compliance costs, which involve the need to reduce subcontractors that are playing an increasingly important role in the increasingly “fast-fashion” driven apparel export market, particularly in Bangladesh, John Kernan, a Cowen analyst, said, adding this is the first time he asked about compliance in the survey. (The rest of respondents cited energy costs as the main concern.)

“Manufacturers are increasingly subcontracting unit orders to factories that are not approved by American and European retailers to manufacture goods,” he said. “Changing compliance is likely to raise the pricing matrix in those regions, where unit costs can be 20% to 30% cheaper than China. As manufacturers are forced to reduce subcontracting there could be order delays and higher costs surrounding the need to airfreight goods.”

In the wake of tragedies including the Rana Plaza factory collapse, global retailers including Wal-Mart, Gap and Abercrombie & Fitch have planned various moves to improve Bangladesh’s worker safety. After a factory fire last year, Wal-Mart has adopted a zero-tolerance rule for unauthorized and undisclosed subtracting.

Bangladesh is the world’s NO. 2 apparel exporter, controlling about 20% of total U.S. apparel imports with a dramatic share increase in recent years, Kernan said, adding China represents 42% of U.S. apparel imports.

With costs look to be heading higher, apparel companies’ profit margins could be hurt because they won’t be able to raise retail prices at the same rate amid intense industry competition for shoppers. Kernan said Wall Street’s consensus estimate for gross margin expansion for every single company in his coverage universe could be at risk. Of special concern is retailers that have seen their inventory growth outpacing sales increase that could lead to profit-eroding price cuts.

They include Aeropostale Inc., Guess Inc., Buckle Inc. and Ann Taylor parent Ann Inc.

Bangladesh: Desperate race to check garment factories   [ top ]

Reuters, August 1, 2013
In the weeks since the Rana Plaza collapse killed more than 1,100 workers, at least five different Bangladesh agencies have sent teams to begin inspecting the estimated 5,600 factories that make up the nation’s $20 billion garment industry.

But there’s little coordination between the agencies, and senior government officials are unable to say just how many factories have been checked. Estimates vary from just 60 to 340.

While US and European retailers which buy the bulk of Bangladesh-made clothing had hoped to complete factory inspections within 9-12 months, inspectors and government officials say this will take at least 5 years.

Bangladesh has fewer than 200 qualified inspectors.

The disconnect among the various agencies conducting what are often cursory visual assessments — Bangladesh has nowhere near enough technical equipment for sophisticated inspections — means some garment factories have been visited several times, while others have had no checks at all.

“It’s a big nuisance for us, and while we’re being put through this, nobody’s checking all the other factories in the vicinity that haven’t had a single inspection,” said Emdadul Islam, a director of Babylon Garments, which supplies Wal-Mart Stores Inc, Tesco Plc and Hennes & Mauritz AB’s H&M stores. “Our managers are focusing on entertaining inspectors instead of their work because none of these teams are speaking to each other.”

Babylon has passed six safety inspections this year. Islam showed Reuters certificates from Bureau Veritas, the firm Wal-Mart has hired to inspect suppliers, and Sedex Members Ethical Trade Audit (SMETA), which inspects Tesco factories. Others to have carried out checks include the Bangladesh textiles ministry and the national garment association, whose 4-person inspection crew spent 3 hours hunting for cracks that could indicate structural flaws like those at Rana Plaza — an illegally built tower where safety warnings were ignored.

A Reuters reporter followed teams of local inspectors touring more than half a dozen factories in and around the capital Dhaka this month, and spoke to factory owners, government officials and engineers to gauge progress in attempts to assure the safety of the garment industry’s buildings.

During a surprise safety check at Miami Garments, a worker unearthed a fire extinguisher from beneath a pile of shirts to show a government inspector. It was the only one in the 15,000 square foot, 4-storey factory. The building code requires one extinguisher per 550 square feet.

Inspector Abdul Latif Helaly and two colleagues from Dhaka’s Capital Development Authority, responsible for urban development, noted it on a list of observations about the factory, which is in a residential building — another building code violation. There was just a single narrow exit staircase, weak floors and structural columns insufficient to support the factory’s load, the inspectors found.

“This is a relatively compliant factory and no action needs to be taken here,” Helaly said after the 30-minute visual inspection, made without the use of any tools. “We have asked the owners to move their factory to a new building soon and they have agreed to do it in the next 1-2 years.”

After signing the factory’s clean bill of health, the inspectors were each handed two shirts by the owners.

Bangladesh pledged to boost worker rights and recruit more safety inspectors after the European Union, which gives preferential access to Bangladeshi garments, threatened punitive measures. Last month, US President Barack Obama cut off trade benefits for Bangladesh in a mostly symbolic response to conditions in the garment industry.

Bangladesh’s garment exports rose 16 percent in June, showing that retailers have not turned away since the Rana Plaza tragedy. A group of 80 mostly European retailers who signed an accord to carry out coordinated inspections in Bangladesh have started hiring and training inspectors on their own to check the around 1,000 factories that supply their brands.

“This whole process is painstakingly slow,” said Jyrki Raina, general secretary of the Switzerland-based IndustriALL union that is overseeing the plan. He said the group would complete only initial safety checks within 9 months, and will take around 5 years to make repairs, conduct final inspections and declare all factories safe.

North American retailers like Wal-Mart and GAP formed their own alliance and are confident of fully checking the 500 factories that supply their members by July 2014. They are hiring third-party agencies to inspect factories and not re-inspect those that have already been passed fit, said Nate Herman, vice president for international trade at the American Apparel and Footwear Association, which is part of the alliance. He said the inspections would begin from November.

At a building safety conference in Dhaka earlier this month, government agencies, the powerful Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and the Bangladesh University of Engineering and Technology (BUET), reached no agreement on how to coordinate safety checks.

Reuters spoke to five officials who attended the meeting and found they had overlapped inspecting some factories and not shared their findings.

“We have to independently verify the buildings and anyway the association cannot be held responsible for the lack of co-ordination. The government needs to look at it,” said Shamsul Haque, the BGMEA’s additional secretary.

The BGMEA, which has 10 inspectors, said it has checked 400 factories and shut 20 of them. The plan is to complete visual inspections of all 2,500 member factories by December — an ambitious average of 12 inspections a day based on teams of 3-4 inspectors taking at least 3 hours to finish each check.

Results of initial visual inspections that raise a red flag are passed on to BUET, the country’s premier engineering university, for closer scrutiny.

While BUET has the expertise to carry out structural inspections, it lacks both the manpower and the gear.

“We need more sophisticated equipment and if we double our staff strength from 30 we can aim to finish a thorough preliminary assessment on all factories in 18 months,” said Mohammad Mujibur Rahman, head of the university’s civil engineering department – which is in talks with the government for permission to hire more people.

On a recent tour of the Bengal Indigo factory, cracks on the walls had been covered with fresh paint and plaster before BUET Professors Mehedi Ahmed Ansary and Raquib Ahsan arrived. “It looks like the owners have tried to cover the cracks, but it’s still visible,” said Ahsan, who like other professors conducts inspections in addition to his full-time teaching job.

The two professors raised concerns about the weight of machines and clothing on the top floor, and noted the building deviated from design blueprints. They asked the company to submit to a voluntary secondary assessment, which will take more than two months as engineers check the plant’s column strength and study steel, concrete and cement samples.

Full inspections on all factories will take up to 7 years, and plans for that are being discussed with the government and the International Labour Organisation, said BUET’s Rahman.

“The post-collapse impetus to inspect factories has slowed and it’s definitely proving to be a challenge to make sure this whole effort doesn’t fizzle out,” he said.

India: Cotton textile exports "should do better"   [ top ]

JUST-STYLE, Raghavendra Verma, July 31, 2013
While the Indian cotton textile industry has increased its global competitiveness over the last decade, its exports have not shown similar results a new study shows.

According to the report compiled by Zurich-based consultancy agency Gherzi, in 2012 the Indian clothing and textile industry employed 35m people and its average wages were almost half of China's but still about double those of Bangladesh and Vietnam. India's export competitiveness against China has improved due to 23% depreciation of the Indian rupee between 2000 and 2012, said the report.

However, India's market share in global textile and clothing trade could only increase from 3% to 4% during the period, while China managed to double its share from 17% to 35%.

The report blamed ad hoc policy interventions that harmed the overall performance of the Indian textile industry. For instance, in 2010, a popular Technology Upgradation Fund Scheme (TUFS) was discontinued for 11 months due to lack of funds, which postponed several textile industry investment projects. And that year, the government capped cotton exports at 720,000 tonnes, harming the expanding spinning sector.

It also pointed out that the fact Indian cotton prices are now close to global norms would help sustain development of the clothing and textile sector throughout the value chain, reducing the risk of cotton price change shocks.

Entitled 'Cost Benchmarking Study - India vis-à-vis Bangladesh, Indonesia, Egypt, China, Pakistan and Turkey', it was commissioned by the Indian Cotton Textiles Export Promotion Council and released in New Delhi last week.