Pakistan may import surging Indian cotton once trade ties restored

The sharp decline in cotton production has caused supply tightness in Pakistan, and currently, Indian cotton has obvious price edge. On concern about the costs and transportation time, Indian cotton is one of the best choice for Pakistan to import. Meanwhile, according to the cotton trade volumes between the two countries in previous years, once the trade ties are restored, Pakistan may increase the imports of Indian cotton significantly.

1. Pakistani cotton imports rise led by supply shortage
According to Pakistan Cotton Ginners' Association, by March 1, total arrivals of 2020/21 cotton reached 874kt, a fall of 34.1% year on year. Cotton procured by spinning mills was 833kt, down 32.2% year on year, and unsold stocks were 29kt, down 67.9% year on year. The continuous decline in cotton production in Pakistan over the past years is mainly attributed to the lower planting areas squeezed by alternative crops, lack of quality seeds, inferior fertilizer and the desert locust disaster this season. In 2020/21 season, Pakistani cotton production is estimated to be 1.309 million tons, a fall of 16.1% from last season.

The sharp reduction in cotton production has caused an abnormal supply shortage in Pakistan, and has also prompted its local cotton prices to continue to hit new highs. On March 5, Pakistani cotton, Karachi spot rate, has reached 92.63cent/lb, higher than Cotlook A Index (92.6cent/lb), ICE cotton futures (87.01cent/lb), Brazilian spot cotton CEPEA/ESALQ Index (90.71cent/lb) and Indian spot cotton index (79.39cent/lb), to be one of the most expensive cotton in the worldwide.

In order to make up for the supply gap, Pakistan's cotton imports have continued to increase since June 2020 compared to the previous year. From January to November 2020, the cotton imports amounted to 719,000 tons, a surge of 91.0% year-on-year.

2. Low-priced Indian cotton is the preferred choice for Pakistan
Due to the lack of detailed import origins of Pakistan, we analyze the imports by major cotton exporters' destinations. According to U.S. cotton weekly export sales and shipments, in the third and fourth quarters of 2020, U.S. cotton export sales to Pakistan increased year on year overall, while in 2021, the export sales to Pakistan have been constantly decreasing, and the export shipments also fail to improve, mainly restrained by high U.S. cotton prices.

Cotton exports of Mato Grosso, Brazil to Pakistan have risen continually in the third and fourth quarters of 2020, while in 2021, the volumes decline obviously, also mainly affected by high prices.

With reference to the nearby shipment prices to China, Indian cotton has obvious price edge. On March 5, it was at 88.6 cents/lb, much lower than 92.63cents/lb of spot cotton in Pakistan. On concern about the transportation costs and time, to export to Pakistan will be obviously better than to China. Therefore, Indian cotton is one of the best choices for Pakistan to import.

According to Indian cotton exports to Pakistan in previous years, the exports reached the highest in 2015 to be 342kt, and the lowest in 2014 and 2020 to be 0. The yearly average exports are 164kt in 2007-2020.

If the trade relations between Pakistan and India are restored, Pakistan will inevitably increase its imports of Indian cotton until the domestic supply gap is eased or the relative price advantage of Indian cotton disappears.

In summary, the sharp drop in cotton production has caused an abnormal shortage of domestic cotton supply in Pakistan. The current price advantage of Indian cotton is very obvious. Superimposed on the border between the two countries, Indian cotton is one of the best choices for imports from the perspective of cost and transportation time. At the same time, referring to the cotton trade volume between the two countries in previous years, once the trade relationship between the two countries returns to normal, Pakistan may significantly increase the volume of Indian cotton imports.