Textile spinners face arbitration due to cancelled cotton orders
Scores of Bangladeshi textile spinners are facing the spectre of international arbitration and "black-listing" after a dramatic fall in cotton prices prompted them to cancel purchase orders worth more than $500 million.
Sources said Liverpool-based International Cotton Association (ICA) has written to the Bangladeshi cotton importers that the cancelled orders could prove "costly and damaging" for the local spinners and importers.
Global suppliers have sought ICA's intervention, with some filing for arbitration, seeking reparation for the last minute's cuts in cotton shipment orders by the Bangladeshi importers. Rules and bylaws set by ICA govern the global cotton market in which Bangladesh is the second largest buyer. Any violation could land a supplier or a buyer in the dock and result in fines worth millions of dollars.
"If found guilty in the international arbitration, many Bangladeshi spinners and cotton importers could be black-listed by the ICA," a top cotton trader told the FE. "This can deal a blow to our prestige as the world's second largest cotton importer and one of the fastest growing textile-producing economies," said Mohammad Ayub, president of Bangladesh Cotton Association.
Ayub won't comment on the number of spinners and indenters now facing arbitration, although he admitted the ICA has sent a letter to his association recently cautioning it about the pitfalls of cancelled orders. But sources in the industry say some 150 spinners, out of the country's 300 plus textile millers, are facing that prospect. Together these spinners spent $2.5 billion to import cotton in the 2010-11 fiscal year.
"Cotton shipments worth more than $500 million have been cancelled after the cotton price tumbled in the international market after March. Our importers simply had no choice but to cancel or freeze the shipments," a top spinner said The dramatic price collapse saw international cotton rate coming down to $1.50 per pound in just four weeks time after the price hit year's peak at $2.30 dollars in late March.
Many importers who placed orders when the market was at its highest were persuaded not to open letters of credit (LCs) as banks feared that spinners would end up with mounting losses. Better-than-expected Indian and Pakistani cotton yields compounded the woes for the local textile millers, as the neighbours' spinners undercut the Bangladeshi yarn producers by 30-40 per cent.
"Our spinners who bought cotton at $2.00-$2.20 per pound found their yarn production cost soaring to $5.0-6.0 per kilogram," said Jahangir Alamin, the president of Bangladesh Textile Mills Association. "By contrast, Indian spinners were 'dumping' Bangladesh market at a rate of $3.50 per kg. Suddenly many mills found that there are no buyers for their high-cost yarn," he said.
In the past, textile millers would have passed on the high cotton price to garment makers, especially knitwear manufacturers, as import rules in the European Union (EU) would compel exporters to buy yarn from local sources.