Price distortions constrain cotton value chain
THE Confederation of Zimbabwe Industries (CZI) says price distortions are constraining smooth operations in the cotton-to-clothing value chain where local spinning companies and downstream operations are facing lint shortage despite availability of the raw material at home as ginners prioritise exports.
The situation is inducing a crippling strain on the cotton to textile related industries who are forced to source foreign currency to import lint, which increases costs of production and threatens business viability and jobs.
The cotton value chain provides economic and livelihood synergies through vertical and horizontal linkages with the textile, apparels, yarn, fabric, oil processing and stock feed among other industries.
In a latest research paper titled: “Pricing Distortions as a Constraint to Smooth Value Chain Operations: The Case of Cotton Lint in Zimbabwe”, CZI says there is an outcry among industry players as spinning factories are struggling to secure the critical raw material.
CZI said the prevailing price distortions were part of the general exchange rate distortions in the country, which recently prompted the Government to take drastic measures to restore sanity through clamping down on speculative market players.
“Lint prices are generally determined in the international market, including the Liverpool Cotton Index Price.
“Thus, the local ginners are price takers and they usually stick to the Liverpool Cotton Index Price as a benchmark for what they would expect,” said CZI.
“However, for Zimbabwe the pricing issue has become subjected to some complexities. Government has initiated efforts to hedge farmers against depressed producer prices and loss of value due to inflation through announcing a minimum price of seed cotton. The announced prices comprise of both United States dollar (USD) and Zimbabwean dollar (ZWL) components post-production.”
According to the report findings, local
Zimbabwean sector players to grow their exports.
Mr Majuru added that youth exporters in the SMEs sector are already setting up distributorship in Zambia to distribute our goods.
In August, the national trade development and promotion organisation facilitated the participation of 15 local companies, including women-led enterprises at the Maputo International Trade Fair (FACIM). Mr Majuru said there were good returns on the leather sector too.
“When you look at Mozambique, the returns in the leather sector are also impressive and we managed to secure markets for their goods and services. The issue of quality in the export sector is not only about what you want but what the consumer wants,” he said.
“Consumers require a certain quality and we are meeting that quality and, in most cases, exceeding the requirements. In that way we remain relevant in the market and create a niche market for products and sell at a higher price.”
The major markets for Zimbabwe’s horticultural exports are Netherlands, United Kingdom, South Africa, Germany, Hong Kong, Portugal, France, China, Norway, Poland and Spain.
The United Kingdom is the second largest importer of Zimbabwean horticultural products.
The Government’s Horticulture Recovery and Growth Plan is expected to stimulate export growth and boost production to meet the growing demand for horticultural produce.
There is growing demand for organic foods among consumers, as more people are becoming health conscious and looking for products that are high in nutrients and low in calories. spinners say they are finding it hard to pay for locally-produced lint in US-dollars at US$0,30 per kg as they also make sales in Zimbabwean dollar terms.
“According to them, paying for lint in USD would erode into their margins. However, the failure by spinners to pay in foreign currency creates an incentive for ginners to export more lint (more than the prescribed 70 percent) as a way of sourcing foreign currency to cover their costs for procurement of raw materials as well as to maximise on returns since the local currency is overvalued at the official rate,” said CZI.
“Cotton Company of Zimbabwe (COTTCO), a key player in the ginning of cotton and the main exporter of cotton lint has currently proposed that it can only release the lint to local spinners at the 60:40 ratio in USD and ZWL price respectively.”
CZI said about 90 percent of the lint is exported, leaving local spinners with about 10 percent in a season (from May to September), which is insufficient to keep them spinning all year round.
HWANGE Colliery Company Limited (HCCL) says the spike in global coal price on the back of rising demand for fossil energy necessitated by the ongoing Russia-Ukraine conflict presents a lucrative opportunity for the company to position itself for increased earnings.
In order to derive full benefit, the giant coal mining factory plans to focus on coal beneficiation and improving the quality of its coal grade.
The coal miner is targeting to ramp up production to more than 150 000 tons per month by end of 2023 from 50 000 tons.
This comes as global coal prices have shot back towards record highs as the Russia-Ukraine conflict continues to raise expectations that European buyers will start loading up on fossil fuel for fear that a standoff between the two nations will cut off gas supplies.
Recently, several European countries announced that they will be reactivating their coal plants to generate electricity. Europe is battling gas supply challenges occasioned by the RussiaUkraine conflict.
To that end, the coal miner seeks to capitalise on the global demand.
“Global coal prices continue to rise amid ongoing Russia-Ukraine conflict and the company
They said the need to balance between quantities that can be exported and what can be left for local value addition was anticipated by policy.
“According to literature as well as players in the cotton value chain, there is a policy requirement that about 30 percent of the lint should be reserved for local players, while the remaining 70 percent can be exported by the ginners,” said CZI.
“Cotton lint had to be controlled to avoid the collapse of the textile industry. This means that the current practice goes against what policy had anticipated, calling for the need to interrogate the main reasons for this development.”
The largest industry body said it was surprising, however, despite the general acknowledgement that there is a 70:30 ratio for exports and local usage of lint, all efforts to locate the policy statement or the regulations, which specifically provide for this were not successful.
In coming up with a possible pathway in solving the lint problem and in reviving a vibrant cotton to clothing value chain, CZI said it has engaged with ginners and spinners and concluded that a viable cotton lint pricing model would need to be set with the input from both ginners and spinners.
“Ideally, the price of lint, which the spinners intends to position itself to benefit from the increase in global demand for fossil energy.
“In this regard, the company will be focusing on coal beneficiation and improving the quality of its coal,” said the company in its interim consolidated financial results for the year ended 30 June 2022.
The company said it plans to build a coke battery by 2025.
“The company is set to receive a washing plant that will be located near mining areas. This equipment will be commissioned during the first quarter of 2023. The company has plans to build a coke battery by 2025,” it said.
Hwange, the oldest coal mining firm exports coke to copper smelters mainly in Zambia and the Democratic Republic of Congo.
Zimbabwe is witnessing huge investments in the coking coal sector as investors seek to take advantage of surging demand in China, the world’s largest consumer of the commodity used for steel production.
Locally, demand is expected to increase on the back of investments in ferrochrome smelting facilities after the Government imposed a ban on raw chrome exports to encourage value addition and beneficiation.
According to the financials, opencast operations produced 1 288 521 tons, which is a 55,59 percent increase in production from the previous year. It attributed the steady production rise to its contract mining model. get from ginners should leave ginners indifferent between exporting and selling their lint locally. Selling lint locally at lower prices than the international market would be seen as a form of subsidy to spinners,” said CZI.
“This means that the exchange rate distortions that manifest themselves in a high parallel market margin is an issue which needs to be resolved.”
CZI said the industry players said once the pricing issue is settled sustainably, both players (spinners and ginners) can work together in regular price adjustments where necessary.
“These limit problems of ginners exporting all the lint at the expense of the local industry. This brings the importance of working as a team rather than in silos,” it said.
The industry lobby group said its members have also called for improved collaborations between industry and the responsible ministries to give timely feedback on critical issues, which enhance the value chain efficiencies.
In 2021, the value of exports from Zimbabwe’s cotton to clothing value-chain industry grew by 132 percent, earning the country US$102,2 million in export revenue. The sector’s exports were mainly driven by cotton lint and cotton yarn exports, which increased to US$85,7 million in 2021 from US$29,1 million the prior year. — @SikhulekelaniM1
“A total of 676 387 tons of coal was produced for Hwange Power Station and Zimbabwe Zhongxin Electrical Energy for electricity generation during the course of the year, which was 124 percent increase from previous year,” said the company.
“Deliveries into the power station were, however, negatively affected by limited stock holding space in the power station.”
However, despite the increase in revenue, the company posted losses for the period of $3,97 billion in inflation-adjusted terms. The net loss is a result of $8 billion exchange loss on foreign legacy debts during the period under review.
Its gross profit increased by 74 percent to $4,54 billion in inflation-adjusted terms compared to the same period last year. This was largely due to a combination of an increase in sales volume and regular product price adjustments in line with market value.
On production levels, a 52 percent increase was achieved during the period under review. The sales volumes, however, increased by only 74 percent compared to 2021.
The company has noted that limited availability of spares and the general increase in prices of maintenance spares and consumables affected the operations negatively.
Meanwhile, the coal firm is still under suspension from the Zimbabwe Stock Exchange following its adoption of an interim administration strategy.