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Insight | Time: Apr 30 2019 5:44PM  Editor:CCFGroup.com
Will tariff reduction make a surge in Pakistani cotton yarn imports of China?
 
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On April 28, Chinese President Xi Jinping met with Pakistani Prime Minister Imran Khan in Beijing. Premier Li Keqiang also met with Imran Khan on the same day. Under the witness of the two prime ministers, Yu Jianhua, deputy minister of commerce and deputy of international trade negotiations, and Masood Khalid, Pakistan鈥檚 ambassador to China, signed the Protocol of the Government of the People鈥檚 Republic of China and the Government of the Islamic Republic of Pakistan on Amending the Free Trade Agreement.銆The head of the International Economic and Trade Relations Department of the Ministry of Commerce introduced the relevant situation of the Protocol.

In the agreement, export-oriented products which Pakistan focuses on like cotton yarn, leather, apparel, aquatic products and nuts are included in the tariff schedule. The details can be queried in the schedule of tariff concessions after the protocol is published. Many market participants started to pay attention to China-Pakistan textile apparel trade as soon as the news came out. If the tariff is reduced or canceled, will China textile apparel market be shocked?

Export volume of Pakistani cotton yarn
The annual output of cotton yarn in Pakistan totaled around 3.4 million tons, containing 65% cotton yarn mainly for domestic consumption. The export volume amounted to 465kt in 2018, accounting for about 11% of total production. The higher export volume once reached over 700kt. The figure below describes total cotton yarn exports of Pakistan and those to China.

Total cotton yarn exports of Pakistan and those to China
Unit: kt Total exports Change Exports to China Change Proportion of exports to China
2013 714 3.50% 529 7.00% 74.20%
2016 509 -21.80% 284.6 -19.10% 55.90%
2017 482 -5.40% 321.7 13% 66.80%
2018 465 -3.40% 324.9 1.00% 69.90%

From above figure it can be seen that cotton yarn exports of Pakistan stayed in downtrend in recent three years, especially in 2016, while those to China increased somewhat in 2017-2018 but still 200kt lower than that in 2013. It indicates lower demand for Pakistani cotton yarn from China in recent years. Among Pakistani cotton yarn exported to China is mainly low-count ones like siro-spun C10S/12S/16S/21S and the demand from Guangdong is large. As Xinjiang cotton yarn production increases in China and the quality of Chinese open-end cotton yarn improves, a part of demand for Pakistani siro-spun cotton yarn is substituted.

How much will the tariff reduction change the import cost?
In current China-Pakistan FTA protocol, import tariff of Pakistani cotton yarn will be reduced or even canceled. How will it affect the market when it reduces to 1% or 0%? And how will those enterprises which cannot enjoy the tariff reduction do?

Pakistani siro-spun C10S cost assessment with tariff rate assumption
Assumption Tariff rate Ordering price ($/kg) RMB cost after tax (yuan/mt)
Current tariff rate 3.50% 2.42 19488
Assumption 1 1.00% 2.42 19023
Assumption 2 0 2.42 18837
Assumption 1-Current rate -2.50% 0 -465
Assumption 2-Current rate -3.50% 0 -651
Note: the exchange rate used is two-month forward selling rate 6.797

From the above figure, if the tariff is reduced to 1%, the cost will decrease 465yuan/mt based on current ordering price and if the tariff at 0%, the cost will reduce 651yuan/mt. It is much attractive for domestic enterprises to order. Thus will the cotton yarn imports of China from Pakistan surge? It needs comprehensive consideration. At present, Pakistani siro-spun C10S with second-tier quality is priced at 18,400-18,600yuan/mt in China, but the conversed forward arrival cost was lower than spot price. That is to say, it is not favorable to order now.銆Calculated on current ordering price, if the tariff declines later, the cost is expected to decrease within 651yuan/mt (assuming the exchange rate changes little), and the profit room is not large, unless ordering price of forward Pakistani cotton yarn moves down or spot Pakistani cotton yarn in China improves, but as things stand, the latter is hard to move up in short run. As a result, the tariff reduction may not make a surge of Pakistani cotton yarn imports of China, but it can restrict further shrinking.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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