Softwood's Management Report July-September 2024

INTERNATIONAL OUTLOOK

The international outlook seems both positive and grim at the same time. The Russia-Ukraine war seems to be tilting in Russia’s favor despite the West’s supporting Ukraine, both financially and militarily. This conflict continues to have an impact on the world economy.

The conflict in the Middle East is escalating. The latest incursion into Lebanon is expanding the theater of war. There is a continuous targeting of the Red Sea, making the Suez canal a riskier route. This has caused the shipping companies to take the longer route, impacting the freights and longer ETAs ultimately making exports more expensive, and increasing the return time on investments for the customers.

The trade war raging between China and the West, brought on by the Chinese EV vehicles, is expanding. Last quarter the Chinese EV manufacturer BYD surpassed TESLA in the US. This eventually led to a 100% tariff on? Chinese EVs by the US and Canada. The EU imposed a 36% tariff on EVs. China responded by canceling contracts worth USD 5 Billion for Canadian Canola (which is 50% of Canada’s canola export). China also canceled all Pork meat and pork products from the EU, causing a massive panic in the EU’s food industry. This coupled with the closure of two big Volkswagen plants in the EU powerhouse, Germany, has many economists worried that a recession may be on the horizon.

In Bangladesh, we see unrest, factory closures, and cancellations of orders. This can help Pakistan’s garment industry, like it did in the time of Covid 19. However, to ensure customer retention, Pakistan cannot bank on the misfortune of others. We need to be a provider of quality products at competitive prices to attract customers.

In a surprising move, the Bangladesh Government has instructed that imports from Pakistan will not be detained for inspection. Under the previous regime, all goods imported from Pakistan underwent 100% inspection. This move should facilitate trade between the two nations.?

The Pakistan Economy saw some stability with a forecasted growth of 2.60% by the end of 2024. According to Government sources, September's inflation was 6.9%, the lowest since January 2021. After reaching the Staff level Agreement of 7 Billion USD for a period of 3 years, it's being hailed as a lifeline by the New Government. However, a stable USD is increasing the labor cost in USD, which in turn is making Pakistan products uncompetitive in the international market.

The country's exports increased by 10.54% ($2.921 billion) to $30.645 billion during the fiscal year 2023-24 compared to $27.724 billion in the corresponding period of 2022-23, according to the Pakistan Bureau of Statistics (PBS).

Imports into Pakistan during June 2024 amounted to Rs. $ 4.99 billion (provisional) as against $ 4.91 billion in May 2024 and $4.31 Billion during June 2023 showing an increase of 15.59% over June 2024.

During 2023-24, cotton area cultivation increased to 2.4 million hectares (ha) against 2.1 million ha last year, showing a growth of only 13.1 percent. In contrast, its production recorded a remarkable increase of 108.2 percent to 10.2 million bales (Fig-2.1). It has a share of 0.7 percent in GDP and 2.9 percent in agricultural value addition. The increase in the area under cultivation has contributed to increased cotton production per hectare. This overall improvement in productivity is linked to a better quality of pest-resilient seeds, favorable weather conditions, and attractive fixation of the intervention price of cotton (Phutti) at Rs 8,500/40 kg at the start of the sowing season.

Pakistan Exports and the Contribution of the Textile Sector

The textile sector’s share in exports shrunk in various categories. Knitwear, despite increasing by 41% in quantity, saw a decline of 4.43% in value. Readymade garments both declined in qty. And value. Home Textiles showed a positive trend. Overall the textile sector growth was only 0.17%, which is quite disappointing.

To maintain our commitment to delivering quality products, SW production has undergone significant upgrades this past quarter. We've nearly doubled our washing capacity by adding 10 new machines, moving us closer to achieving a fully integrated cut-to-pack production facility.

Additionally, we’ve invested in a new product line for quilted jackets and have successfully installed the necessary machinery, with trials already in progress.

In response to rising costs in today's market, Softwood remains focused on streamlining and automating its processes. A newly installed Welt Pocket machine will significantly boost our production efficiency and ensure superior product quality.

SW Buying House remains focused on exploring new markets and expanding its product range. While Pakistan may not be the lowest-cost option, our marketing team is actively pursuing high-potential leads, aiming to turn them into long-term customers.

Securing large clients continues to be a challenge, but the team has seen steady success in bringing several smaller customers on board.

Challenges

The challenges remain more or less the same. The most significant being the hike in power cost. This alone has made surviving difficult. To mitigate the impact, SW has installed a capacity of approx 200MWh/year via Solar energy.

A high labor cost is also contributing towards a higher product cost. With easy access to automation and technology, an effort should be made to reduce this.

Going Forward

Foreseeing difficult times ahead, only companies that manage to stay competitive will be able to survive. A lean but highly productive and dedicated workforce is necessary. Similarly, any inefficiencies in the system need to be eliminated.

Training and skill upgrading on a regular basis is a must.