Garment exporters walking a tightrope
Faced with rising production costs that do not match the prices being offered by global buyers, Bangladesh garment exporters are walking a tightrope amid uncertainty about long-term survival by weathering these challenging times.
Already grappling with gradual increases in commodity prices, skyrocketing freight costs and hikes in domestic utility tariffs, the apparel sector’s profit margin has shrunk and the spate of export orders isn’t keeping its business viable, industry insiders say.
A new wave of Covid-19 in China, the main source of clothing raw materials, has increased their concerns about future production.
Garment industry leaders have told The Business Standard that many ready-made garment exporters in the country are now struggling to break even.
“It’s like running on a treadmill and achieving nothing but burning calories,” said Navidul Huq, director of the Mohammadi Group, describing the difficulties they are going through.
Local value added in the country’s RMG industry has fallen to its lowest level as production costs have risen, they said, adding that they are continuing this business with the only expectation that the situation will improve once the Covid pandemic is over.
However, economists have observed that some European countries and the US are grappling with high inflation rates not seen in 40 years, which could negatively impact the global economy as well as growth in apparel exports.
Meanwhile, China’s biggest city and financial powerhouse Shanghai last week began a two-stage lockdown after the country’s worst outbreak since the outbreak of the pandemic in Wuhan in late 2019, which has already impacted the commodity supply chain.
China supplies 80% to 90% of Bangladesh’s garment sector’s raw material needs. But the lockdown in Shanghai is causing shipments of raw materials, documents and samples — by both air and sea — to take almost four times longer than usual to arrive in Bangladesh, industry insiders said.
On the other hand, garment manufacturers have no choice but to deliver goods by air to ensure timely delivery of their export products, which affects their bottom line.
Work orders aplenty, prices aren’t going up much
Navidul Huq, director of Mohammadi Group, pointed out the precarious situation of garment exporters, telling TBS: “We garment exporters are in a marathon. We’re accelerating by exporting more, but can’t accomplish anything except burn out while spinning the wheels.
He further explained the situation, saying that they accept orders and set product prices by calculating current production costs, but cannot increase product prices even if production costs increase due to increases in raw material prices or other reasons after confirming an order.
“We have no leeway to negotiate prices if raw materials become more expensive after order confirmation. Manufacturers are suffering this loss,” said Navidul Huq, also director of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
Echoing Navid, Md Ashikur Rahman (Tuhin), general manager of TAD Group, said that the garment exporters now enjoy a good flow of orders from buyers as it is the peak production time to prepare for the next season, but the buyers do not pay in parallel with the production cost increases.
Manufacturers operating on the Freight-on-Board (FOB) regime are under pressure due to rising raw material prices, while those operating on the Cost-of-Making (CM) regime are under pressure due to an increase in Freight costs are under pressure. he added.
Siddiqur Rahman, chairman of the Starling Group, said RMG manufacturers should continue production even if they incur losses, as factory closures result in further financial losses for them.
The industry has enjoyed a good flow of work orders from the EU and US markets, but the recent war between Russia and Ukraine has broken the rhythm as many EU buyers have stores in those two countries, he added.
The US market continues to grow, but buyers there are reluctant to hike product prices in line with rising commodity prices and other costs, said Siddiqur, also a former BGMEA president.
Growth hits record low
According to Bangladesh Bank, value added in RMG sector fell to 55.80% in July-December of the current fiscal year 2021-22, down from 63.37% in the first half of the previous fiscal year.
Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS that the value-added ratio likely fell even further from January to March this year as commodity prices continued to rise during the period.
Explaining, he said, “For example, we used to get $3 as the cost of making a dozen T-shirts, when the cumulative cost of fabrics, accessories and other work was $12 at the time. Due to recent increases in raw material prices, this cost has exceeded $15, but buyers are paying us the same manufacturing cost.”
Kutubuddin Ahamed, CEO of Envoy Textile Ltd, also attributed the decline in the value added rate to an increase in raw material prices on the world market.
Cotton and yarn prices have been rising for a long time. Freight costs have also increased by about five times. But product prices still need to be adjusted.”
“Many entrepreneurs operate their factories at break-even costs, while some others cannot even book break-even costs. But they continue with their business and hope for a recovery when the pandemic situation normalizes,” he added.
Rising freight costs are a major challenge for the export-import trade, he said, adding businessmen should wait for the global shipping situation to normalize, said Kutubuddin, also a former president of the BGMEA.
Shams Mahmud, Managing Director of Shasha Denim Mills Ltd said: “Buyers set commodity prices at the start of the season, which they used to create inventory plans for the stores. So when production costs started to increase, buyers couldn’t make a premium and manufacturers had to take that part of their profit margins.
It also eased the moratorium on bank repayments, putting an additional strain on exporters, he said, adding that large companies faced the problem of exceeding a single borrower’s risk limit at banks due to an average escalation in commodity prices of nearly 70%.
He explained this with an example. “Whereas it used to be $1 million to make 500,000 yards of fabric, now it takes us $1.7 million to make the same order. So you can clearly see that value creation is being eroded as buyers have not been able to adjust prices mid-season,” he said.
“Unfortunately, taking all of these factors into account, we can predict that we will see less value added in this year’s data than before as the cost of inputs impacts our competitiveness.”
However, the apparel exporter expressed hope that the government will announce policy support for this industry in the upcoming state budget, which will help it ease the transition and stay competitive in the years to come.
Production costs are likely to continue to rise
Mohammad Ali Khokon, chairman of the Makson Group, said the cotton index has again reached its all-time high, which could lead to a further rise in yarn prices.
According to Bloomberg, the ICE cotton index hit a decade-high of 141.80 cents a pound on March 31 this year.
Also, if the government implements gas price hikes proposed by concerned government agencies, electricity tariffs in the country are likely to rise, which will also boost commodity prices, Khokon said.
Rising inflation a new threat
Mohammad Abdur Razzaque, chairman of Research and Policy Integration for Development (RAPID) Bangladesh, told TBS that the whole world is facing an inflation trend that could impact global clothing demand.
Companies with large manufacturing capacities may be able to stay afloat despite rising commodity prices, but smaller companies will struggle to survive, he noted.
He also mentioned that political support for one particular government may not prove sufficient to address a global issue like rising global commodity prices.
Shanghai lockdown strikes fresh blow
BKMEA’s Mohammad Hatem mentioned that the lockdown in Shanghai port caused by Covid-19 has forced him to import fabrics by air freight and yet he is having difficulty releasing the imported goods without documents.
“Shipping documents are still stuck in Shanghai as the city is under strict lockdown. Also, importing goods by air will further increase my production costs.”
Pointing to the disrupted shipping service at sea, he said in general that faster ships need 12 days and slower ships need 20-25 days to reach Shanghai Chattogram port, but they will take more time now because of the lockdown, he added.
“We know how to survive in difficult situations”
However, Fazlee Shamim Ehsan, vice president of the BKMEA, said apparel entrepreneurs have learned to survive in any adverse situation.
“We managed to survive after the Multi-Fibre Arrangement (MFA) quota went away.
“We always focus on surviving in any adverse situation rather than making a profit, and that helps us keep buyers’ trust.”
According to data released by the Export Promotion Bureau (EPB), ready-to-wear clothing shipments in July and February of FY22 grew about 30% to $27.49 billion from the corresponding period last year.