Once buoyed by growing demand, textile mills sink in gas crisis, fewer orders

Infographic: TBS

As the global supply chain recovered from the upheaval caused by the Covid-19 pandemic in the latter part of 2021, Western consumers emerged from lockdowns, sparking an unprecedented surge in garment orders for Bangladesh. Consequently, the country witnessed a remarkable 34% increase in exports, reaching $52.08 billion in FY22.

However, this economic boon swiftly transformed into a formidable challenge for textile millers, who found themselves struggling to meet the surging demand for yarn and fabrics crucial to garment production.

In response to the urgency of the situation, a section of millers injected over Tk10,000 crore into the industry, either by establishing new mills or expanding existing capacities.

Unfortunately, what was initially an investment for growth has now devolved into a nightmarish scenario as export orders have significantly dwindled, worsened by soaring utility bills, forcing textile mills to operate at only half their capacity.

Yet, this is not the sole source of their tribulations.

The current political unrest with the accompanying blockades, continuous disruptions in gas supply, dollar crisis and workers' movement demanding wage hikes, have compelled many factories to stop operations in recent days. Complicating matters further, geopolitical tensions and soaring inflation in Western markets have put export orders in uncertainty.

The repercussions from this turn of events have extended to the banks that provided financing to these textile mills. Currently, scheduled instalments have become irregular, compelling them to reschedule loans.

According to the managing directors of two private banks, they have had to reschedule an average of five loans for textile millers each month in the current fiscal year.

Fazlul Haque, managing director of Israq Textile Mills, one of the country's largest, captures the prevailing pessimistic sentiment in one short sentence, "I have never witnessed such a challenging period in the country's spinning sector."

Haque, encouraged by the prospects of growth, proceeded to establish a new mill with a substantial capacity of 1.05 lakh spindles at a total cost of Tk600 crore.

The factory has been fully operational for the past three months but production has been handicapped by sluggish demand.

Describing his predicament, Haque tells The Business Standard, "The thought of the bank loan is a pressing concern. Added to that is the apprehension and uncertainty about continuing production. The current slack demand makes the future uncertain."

Syed Nurul Islam, chairman and CEO of Well Fabrics, terms the present situation in the textile sector as "catastrophic."

He says textile millers had a very good time in 2021 and 2022. But 2023 has appeared as a year of struggle which many of them did not predict.

Says Nurul Islam, a director and spokesman of the Bangladesh Textile Mills Association (BTMA), "Banks are sending letters to many of our millers. Many borrowers are trying to reschedule their loans, but not all of them are successful."

He points out the significant spike in gas bill for his factory, specialising in man-made fibre, which surged from Tk2 crore to Tk7 crore per month. This escalation followed the government's unprecedented 179% increase in gas prices in January, effective from 1 March.

Razeeb Haider, managing director of Outpace Spinning Mills, says gas and power prices have increased and they cannot pass it fully on to the buyers.

"Factories are closed for the last 10-12 days and banks will not waive interest on loans. This is very painful for compliant borrowers," he adds.

Expansion was unwise and imprudent

There are approximately 400 spinning mills supplying yarn and fabrics to export-oriented garment industries. Additionally, more than 200 mills serve the domestic market.

Despite this, the BTMA reports the establishment of at least 10 new factories in 2020 and 2021. Also, industry insiders say, over a dozen factories expanded their existing capacity between 2020 and 2022.

KM Rezaul Hasanat, chairman and CEO of Viyellatex Group, with exposure in RMG and textile mills, comments that businesses expanding or establishing new mills in 2021 and 2022 did not make wise decisions.

"First-generation businesses invested fresh funds based on a short-term phenomenon, such as a surge in demand. They failed to consider whether this demand would continue in the months or years to come," he tells TBS.

"Now, they find themselves in a trap," he adds, emphasising that banks cannot avoid their responsibility.

Hasanat believes that before providing financing to these new mills, banks should have studied the sustainability of such ventures.

"Unfortunately, banks never provide such advice in our country," he notes.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says the decision to take loans ultimately depends on the customers rather than the banks. "If I decline to lend, another bank will step in and provide the loan."

However, he acknowledges that banks have a responsibility to thoroughly assess the business before extending a loan.

Exports on decline

When Bangladesh achieved the milestone of crossing $50 billion in exports for the first time in FY22, there was optimistic speculation that the country could potentially reach $100 billion in the coming years.

However, these expectations were dampened by the onset of the Russia-Ukraine war in February 2022.

The growth in merchandise exports decelerated significantly dropping to a mere 6.67% in FY23 from the impressive 34% in the preceding year. According to Export Promotion Bureau data, export growth for the period of July-October in this fiscal year showed a modest increase of only 3.52%.

Of greater concern is the notable decline in the export growth of the ready-made garments sector, encompassing both woven and knitwear. RMG exports from July to October in the current fiscal year grew by only 5.95%, nearly half of the growth seen during the same period the previous year.

Apparel exports to the US declined by 23.33% year-on-year to $5.78 billion in the first three quarters (January-September) of 2023, as slow demand for apparel products continued due to high inflation in the US.

Exports are also declining to Germany, the second largest destination for Bangladesh-made apparel products.

While knitwear exports still maintain a positive trajectory, woven exports have experienced a nearly 2% decline in the first four months of this fiscal year.

Gas crisis a major barrier

The gas crisis poses a significant obstacle, particularly affecting factories in the Narayanganj zone housing around 100 textile mills that have been grappling with severe disruptions in gas supply despite footing higher costs for gas.

Textile millers in Gazipur and Maona areas also lament that, despite a substantial 179% increase in gas prices for industries since February of this year, the promised uninterrupted gas supply has not materialised.

Industry owners are bearing the brunt of escalated gas and electricity prices without receiving the pledged uninterrupted gas supply, they say.

Many report that, although their factories are rated for 10psi, they are currently receiving only 2-4psi severely hampering their production.

The BTMA last year said the country's export-oriented textile sector had incurred a production loss worth $1.75 billion in three months due to inadequate gas supply.

According to data from Petrobangla, the country's daily gas demand was 3,500mmcf as of 12 November, while the daily supply fell significantly short at 2,591mmcf.

Yarn price stable despite demand decline

In a positive development, yarn prices have managed to hold steady despite a decline in demand. Millers said that the current cost per kilogram of yarn is $3.10, a decrease from $3.50 the previous year. However, at the beginning of this year, the price had briefly dropped to $2.90 per kilogram.

If demand had remained robust and if they could've run their factories at full capacity, the price of yarn could have experienced a greater increase compared to its current level, millers say.