Clothing exporters on a tightrope
With rising production costs that do not match the prices offered by global buyers, Bangladeshi garment exporters are walking a tightrope amid uncertainty about their long-term survival in weathering these difficult times.
Already grappling with gradual increases in commodity prices, exorbitant transportation costs and rising domestic utility rates, the apparel sector’s profit margin has shrunk and the influx of export orders will not does not guarantee the viability of their business, according to the industrialists.
A new wave of Covid-19 in China, the main source of raw materials for the garment, added to their worries about future production.
Garment industry leaders told The Business Standard that many ready-made garment exporters in the country are now struggling to break even.
“As if we were running on a treadmill, achieving nothing but burning calories,” said Mohammadi group manager Navidul Huq, describing the difficulties they are going through.
Local value added in the country’s RMG industry has fallen to its lowest level following the surge in production costs, they said, adding that they were continuing this activity with the only anticipation that the situation would improve. will improve once the Covid pandemic is over.
Economists have however observed that some European countries and the United States are struggling with high inflation rates not seen in 40 years, which could have a negative impact on the world economy as well as on the growth of exports of clothes.
Meanwhile, Shanghai, China’s largest city and financial powerhouse, began a two-stage lockdown last week following the country’s worst outbreak since the pandemic began in Wuhan in late 2019, which has already begun. affect the raw material supply chain.
China covers 80 to 90% of the raw material needs of the clothing sector in Bangladesh. But the lockdown in Shanghai is causing shipments of raw materials, documents and samples – by air and by sea – to take almost four times longer than usual to arrive in Bangladesh, according to industry insiders.
On the other hand, garment manufacturers have no choice but to deliver the goods by air to ensure the timely delivery of their export products, which hurts their bottom line.
Orders galore, prices don’t go up much
Highlighting the precarious situation garment exporters find themselves in, Navidul Huq, Director of Mohammadi Group, told TBS: “We garment exporters are in a marathon race. can do nothing but get exhausted while spinning the wheels.
Explaining the situation in more detail, he said that they take orders and set product prices by calculating current production costs, but cannot increase product prices even if production costs increase due to the increase in raw material prices or for other reasons following the confirmation of an order.
“We have no opportunity to negotiate prices if raw materials become more expensive after any order is confirmed. Manufacturers have to accept this loss,” said Navidul Huq, also director of the Garment Manufacturers and Exporters Association. of Bangladesh (BGMEA).
Echoing Navid, Md Ashikur Rahman (Tuhin), Managing Director of TAD Group, said garment exporters are now enjoying a good flow of orders from buyers as it is peak production time to prepare. for the next season, but the buyers are not paying. depending on the increase in production costs.
Manufacturers working on a freight on board (FOB) basis are under pressure due to rising raw material prices, while those working on a manufacturing cost (CM ) are under pressure due to increased transportation costs, he added.
Siddiqur Rahman, chairman of Starling Group, said RMG makers should continue production even if they suffer losses, as factory closures mean more financial losses for them.
The industry had enjoyed a good influx of work orders from EU and US markets, but the recent Russian-Ukrainian war broke the tempo as many EU buyers have businesses in both countries, he added.
The U.S. market continues to grow, but buyers are unwilling to raise product prices based on soaring commodity prices and other costs, said Siddiqur, also a former BGMEA chairman.
Added value reaches record level
According to Bangladesh Bank data, the value added in the RMG sector fell to 55.80% during the July-December period of the current financial year 2021-22, which was 63.37% during of the first half of the previous financial year.
Mohammad Hatem, executive chairman of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS that the value added ratio likely fell further in January-March this year as raw material prices continued to decline. increased over the period.
As an explanation, he said, “For example, before, we used to get $3 for the manufacturing cost of a dozen t-shirts while the cumulative cost of fabrics, accessories and other labor was $12 at the time. Due to recent increases in raw material prices, these costs have risen to over $15 but buyers are paying us the same manufacturing cost.”
Kutubuddin Ahamed, chairman of Envoy Textile Ltd, also attributed the decline in value added rate to an increase in raw material prices in the global market.
Cotton and yarn prices have been on the rise for a long time. Freight cost also increased by about five times. But product prices still need to be adjusted.”
“Many entrepreneurs run their factories at break-even costs, while others are unable to record even break-even costs. , he added.
Rising shipping costs are a major challenge for import-export trade, he said, adding that entrepreneurs should wait for the global shipping situation to normalize, said Kutubuddin, also a former chairman of the BGMEA.
Shams Mahmud, Managing Director of Shasha Denim Mills Ltd, said: “Buyers determined the prices of goods at the start of the season, with which they made inventory plans in the stores. When production costs began to rise, buyers could therefore charge no extra, and manufacturers had to let this part out of their profit margins. »
In addition, the moratorium on bank refunds has been relaxed, which has put additional pressure on exporters, he said, adding that due to an average escalation of nearly 70% in commodity prices first, large companies began to face the problem of exceeding exposure to a single borrower. limit with banks.
He explained it by giving an example. “If $1 million was the cost of producing 500,000 yards of fabric before, now we need $1.7 million to make the same order. So you can clearly see that the added value is being eroded because buyers couldn’t adjust prices mid-season,” he said. noted.
“Taking all of these factors into account, we can unfortunately predict that in this year’s data, we will see lower value added than before, as input costs hurt our competitiveness.”
The garment exporter, however, expressed hope that the government, in the next national budget, will announce policy support for the industry, which will help it ease the transition and remain competitive in the years to come.
Production costs are expected to rise further
Mohammad Ali Khokon, chairman of the Makson Group, said the cotton index once again reached its highest level ever, which could lead to a further increase in yarn prices.
According to Bloomberg, the ICE cotton index peaked at 141.80 cents per pound on March 31 this year.
In addition, electricity tariffs are likely to increase in the country if the government implements gas price hikes proposed by relevant government agencies, which will also drive up commodity prices, Khokon said. .
Rising inflation, a new threat
Mohammad Abdur Razzaque, chairman of Bangladesh Research and Policy Integration for Development (RAPID), told TBS that the whole world is facing an inflationary trend which may affect the global demand for garments.
Firms with large-scale production capacity may manage to stay afloat despite commodity price increases, but smaller firms will struggle to survive, he observed.
He also mentioned that the political support of a particular government may not be enough to solve a global problem such as the surge in world commodity prices.
Shanghai lockdown deals another blow
BKMEA’s Mohammad Hatem mentioned that the Covid-19 induced lockdown in the port of Shanghai has forced him to import fabrics by air freight, yet he struggles to clear imported goods without documents.
“Shipping documents are still blocked in Shanghai because the city is strictly closed. In addition, importing goods by air will further increase my production costs.”
Highlighting the interrupted shipping service by sea, he said that generally faster ships take 12 days and slower ships take 20-25 days to reach Chattogram Port from Shanghai, but now they will take longer. time due to the lockdown, he added.
“We know how to survive in difficult situations”
Fazlee Shamim Ehsan, vice president of BKMEA, however, said apparel entrepreneurs have learned to survive any adverse situation.
“We managed to survive after the Multifibre Arrangement (MFA) quota was withdrawn.
“We always focus on surviving in any adverse situation instead of making profits and that’s what helps us retain buyer confidence.”
In July-February FY22, ready-to-wear shipments grew about 30% to $27.49 billion from the same period a year earlier, data shows. published by the Export Promotion Bureau (EPB).