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Tuesday, September 27, 2022
HomeBusinessPrice Distortions Cripple Cotton Lint Value Chain-CZI

Price Distortions Cripple Cotton Lint Value Chain-CZI

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The Confederation of Zimbabwe Industries (CZI) says the distorted pricing within the cotton lint value chain has led to critical supply shortages to local spinning factories.

The country’s cotton to clothing value chain has suffered immensely due to lack of mechanisms to bail out both the ginners and spinners by cushioning them against the effects of the parallel market premium.

In its latest Value Chain Paper for cotton lint, the industry body said there is need for urgent interventions to save this critical sector.

“The pricing issues, which can be traced to the general exchange rate distortions in the country, remain at the core of having enough cotton lint for the well-functioning of the cotton to clothing value chain,” said CZI.

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.

Cotton production supports the livelihoods of over 500,000 families directly and is principally grown in marginal low rainfall areas of Natural Region 4

Cotton is also one of the cash crops in Zimbabwe that bring foreign currency and support job creation at different nodes in the value chain.

“However spinners are citing that they are not able to pay for the lint in USD (US0.30 per kg of lint), since they also make local sales in ZWL$ from the lint. According to them, paying for lint in USD would erode into their margins,”

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“However, the failure by spinners to pay in foreign currency creates an incentive for ginners to export more lint (more than the prescribed 70%) 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.”

However, there has been a semblance of some convergence between the Zimbabwe Dollar and the USD in the past two weeks anchored on a tight monetary policy stance by government. However it remains to be seen for how this stability shall be sustained which other economic experts say it’s hinged on borrowed time.

The ZWL weakened to $ 613 slowly closing the gap on $ 650 lowest parallel market rate.

Zimbabwe has a ginning capacity of up to 700,000 metric tons per year against the yearly production of 195 991 metric tons and 101,000 metric tons in 2020/21 and 2019/20 season respectively.

Cotton and yarn exports from Zimbabwe increased from US$30.1 million in 2020 to US$85.7 million in 2021.

Cotton value chain starts with production of seed cotton by farmers followed by the separation of seed from fibre which is done at the ginneries. This then triggers the beginning of the lint spinning and other value addition processes.

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The ginning segment is very important in the cotton-to-clothing value chain as it is linked both to the farmers on one hand and to the textiles and clothing industry on the other through the spinning mills. Thus ideally ginners should be the ones having contracts with farmers for seed cotton while spinners rely on ginners for lint for the value chain to be well functioning.

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.

“On the other hand it is alleged that private ginners are demanding payment in USD only. Spinners cited that if they pay in USD prices, their production costs will be very high such that they will compromise the whole value chain on the import substitution agenda. Their customers will be forced to import yarn rather than sourcing it from local spinners,” said CZI.

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