Scores of Bangladeshi textile spinners are facing the spectre of international arbitration and "black-listing" after a dramatic fall in cotton prices prompted them to cancel purchase orders worth more than $500 million.
Sources said Liverpool-based International Cotton Association (ICA) has written to the Bangladeshi cotton importers that the cancelled orders could prove "costly and damaging" for the local spinners and importers.
Global suppliers have sought ICA's intervention, with some filing for arbitration, seeking reparation for the last minute's cuts in cotton shipment orders by the Bangladeshi importers.
Rules and bylaws set by ICA govern the global cotton market in which Bangladesh is the second largest buyer. Any violation could land a supplier or a buyer in the dock and result in fines worth millions of dollars.
"If found guilty in the international arbitration, many Bangladeshi spinners and cotton importers could be black-listed by the ICA," a top cotton trader told the FE.
"This can deal a blow to our prestige as the world's second largest cotton importer and one of the fastest growing textile-producing economies," said
Mohammad Ayub, president of Bangladesh Cotton Association.
Ayub won't comment on the number of spinners and indenters now facing arbitration, although he admitted the ICA has sent a letter to his association recently cautioning it about the pitfalls of cancelled orders.
But sources in the industry say some 150 spinners, out of the country's 300 plus textile millers, are facing that prospect. Together these spinners spent $2.5 billion to import cotton in the 2010-11 fiscal year.
"Cotton shipments worth more than $500 million have been cancelled after the cotton price tumbled in the international market after March. Our importers simply had no choice but to cancel or freeze the shipments," a top spinner said
The dramatic price collapse saw international cotton rate coming down to $1.50 per pound in just four weeks time after the price hit year's peak at $2.30 dollars in late March.
Many importers who placed orders when the market was at its highest were persuaded not to open letters of credit (LCs) as banks feared that spinners would end up with mounting losses.
Better-than-expected Indian and Pakistani cotton yields compounded the woes for the local textile millers, as the neighbours' spinners undercut the Bangladeshi yarn producers by 30-40 per cent.
"Our spinners who bought cotton at $2.00-$2.20 per pound found their yarn production cost soaring to $5.0-6.0 per kilogram," said Jahangir Alamin, the president of Bangladesh Textile Mills Association.
"By contrast, Indian spinners were 'dumping' Bangladesh market at a rate of $3.50 per kg. Suddenly many mills found that there are no buyers for their high-cost yarn," he said.
In the past, textile millers would have passed on the high cotton price to garment makers, especially knitwear manufacturers, as import rules in the European Union (EU) would compel exporters to buy yarn from local sources.
But since January 1, the EU has eased import rules of origin, allowing Bangladeshi garment makers to ignore local yarns for cheap raw materials of India, China and Pakistan.
"High cotton is not a problem as long as we have the market to sell our yarn. But the latest EU rules allowed foreign spinners to undercut us, leaving us with losses worth more than a billion dollars," said Alamin.
A textile miller said under such a hostile situation order, cancellation was the "logical and most rationale" choice for the Bangladeshi spinners -- the biggest victims of volatile global cotton market
"Today cotton is trading at $1.23 per pound. Had we honoured the import orders at $2.30, we simply would have faced billions of dollars of losses," said Nurul Huda, managing director of Bashar Spinning.
"It would also have put many banks in serious troubles as they would have been left with similar losses because spinners could no way clear their debt," he said.
Huda said many Bangladeshi companies are better off being "black-listed" than left with cotton that is too costly. "This is the only way to save the country."
"In the past several Bangladeshi companies were black-listed for similar reasons. But they have survived and returned to international market," he said.
Till now Narayanganj-based Jubeda Spinning, the country's largest spinner, was the worst sufferer of global cotton market volatility.
In 2009 it incurred losses worth Tk900 million after it bought cotton at the year's highest rate only to see it tumble down by half in just a couple of months.