Pakistan textile sector performance far from satisfactory

In continuation of the previous month's positive performance, external trade shows improvement in November 2016 exports amounting to US$1.76 billion, exhibiting reversal from the consistent monthly downward trend seen this year. Textiles and clothing sector, which constitutes more than 60% of country's exports also picked pace, rising 9.7%YoY to US$1.05 billion during the month under review. This growth was broad-based recovery in both low value (+15.6%YoY) and value-added segments (+7.6%YoY). However, on a cumulative basis, 5MFY17 textile exports were still lower at US$5.13 billion.

Going forward, analysts expect textile exports to largely remain under pressure due to: 1) demand side bottlenecks with weak Chinese demand outlook and economic slowdown in the EU following Brexit, 2) lower currency competitiveness amid sharp depreciation in regional currencies and 3) low commodity prices. That said, sector anxiously await yet to be announced incentive package estimated around Rs75 billion by the Government of Pakistan (GoP). This aimed at enhancing export competitiveness over regional countries and providing relief to the textile sector. Moreover, encouraging cotton arrivals to date for MY17 (up 12.33%YoY to 10.14 million bales) is expected to reduce cotton shortfall next year.

Performance of the value added sector posted growth with Knitwear, Readymade garments and Bedwear registering double digit growth. Moreover, the low valued added segment depicted commendable recovery after a consistent decline this year, where exports of cotton yarn increased by 42.1%YoY/10.3%MoM. However, on a cumulative basis, textile exports after recovery still remain unimpressive with 5MFY17 exports recording a decline of 2.0%YoY.

According to the fortnightly cotton arrivals report of PCGA, a total of 10.14 million bales arrived in the country by Mid December this year as against 9.03 million bales last year, up 12.33%YoY. Arrivals from Punjab increased by 19.38%YoY to 6.44 million bales, while flows from Sindh increased marginally by 1.86%YoY to 3.70 million. Initially the GoP had fixed the target of cotton for MY17 around 14 million bales, which was later slashed to less than 11 million bales. In an attempt to ensure ample availability of cotton in the country, the GoP has also lifted ban on cotton from India.

Going forward, any substantial increase in the export of textiles and clothing seems unlikely amid emerging: 1) concerns on low currency competitiveness following sharp decline in regional currencies, 2) risk of potential decline in exports to European Union post Brexist and 3) sluggish Chinese demand. The added irritants are disruption in supply of electricity and gas despite high tariffs. Ministry of Textiles, Ministry of Commerce and Trade Development Authority of Pakistan (TDAP) seems to have gone into complete hibernation.

What are the motives behind alleging Russia of hacking US election?

In one of my recent posts I have stated that elections are engineered in third world countries but in the US election is engineered in an organized manner. After the victory of Donald Trump a debate has started in the US that Russia has hacked election. Accepting all my inadequacies the following points come to my mind. I request my reads, especially the think tanks from the United States and those in power in Russia to help the world in understanding the purpose behind this propaganda.

My first question is, has Russia attained power to rig election of a country that has defeated USSR in Afghanistan, which led to disintegration of the then second largest super power?

My second question, what is the motive behind this propaganda?

My third question, what are the motive behind maligning Russia or CIA and NSA?

My fourth question, why entry of Donald in White House is being denied?

My fifth question, who is the bigger war monger, Donald or mighty CIA, NSA and Pentagon?

My sixth question, is the media in the US also subservient to military might?

As I have accepted earlier my inadequacies, kindly have some patience to read my replies also.

My explanation to the first question is that there is a clear motive behind accusing Russia, killing two birds with the same stone. While the effort is aimed at maligning Russia, it is also exposing failures of CIA and NSA. I will abstain from raising finger at Russia, but tend to agree with those who have been saying that CIA/NSA and Pentagon have been acting on false information, the worst being presence of weapons of mass destruction in Iraq.

The reply to my second question may sound outrageous but I could not resist from saying it. Despite all the propaganda against Donald, Hillary lost the election. This is a defeat of those who could be termed non-state actors, the Zionists. May be they believe that establishing a link between Donald and Russia could stop his entry into the White House.

The reply to third question is that lately Russia has defeated the US on various fronts, specifically in Syria. This has happened despite the best efforts and tall claims of CIA and NSA. Those believing in maintaining status quo are not ready to accept their defeat. However, while accusing Russia they forget that they are also accepting failure of their intelligence agencies. In my views they are accepting the supremacy of Russia to seek more funds for CIA and NSA for their capacity building to open new war fronts around the globe, the next front is South China Sea.

The possible explanation of fourth question is the apprehension that Donald’s cordial relationship with Russia may lead to withdrawal of support for ISIS and closing of the front in Syria. This is being taken as a victory of Iran, which the Zionists don’t approve. Ironically, US military might, intelligence and ‘embedded journalists’, who have been counting days of Syrian President are not ready to accept their defeat.

To find reply to fifth question readers have to read my latest post, US war mania. Over the years I have been saying that US is the biggest arms supplier and to increase sale of arms it has to create new rebel groups, provide them funds and training to sell arms to the incumbent governments of these countries. Contrary to the impression created by dishonest western media, I have a feeling that Donald wishes to focus more on domestic issues, spend more funds on creation and improvisation of infrastructure for the benefit of masses rather than spending billions of dollars of taxpayers’ money on proxy wars. This policy of Donald is not approved by war mongers and owners of the armament factories of the US.

Lesson of the story is that the US citizens are so engrossed in ‘other’ activities that they even don’t have time to question why tax payers’ money is being spent on wars rather than on millions of US citizens still living below the poverty line. Groups having vested interest have been preaching ‘change of regime’ in countries around the world must also do the same at home.  

US war mania

Today Facebook reminded me that on 17th December 2011, I posted a question: do you believe that after taking an exit from Iraq, USA is trying to open new fronts? I also apprehended that some of the potential targets among Muslim countries could be Iran, Pakistan and Saudi Arabia. I also asked the readers: does my assertions carry any weight?

When I posted this question about five years back, I didn't have good knowledge of geopolitics in South Asia and MENA. If I look at 5-year history now, ongoing war in Syria and changed relationship of US with Saudi Arabia show that the world’s super power wants to keep war ongoing in this region. The US has not attacked Saudi Arabia but has caused it huge economic losses by bringing down crude oil price per barrel to less than US$35 from US$ 147. Even at present price is hovering around US$ 50 because of Saudi Arab led OPEC effort to cut output but US is taking full advantage of the prevailing situation.

If one looks at the US mania to topple Syrian President Assad, the only conclusion that could be drawn is US war mania. The history also shows that the US initiated war in various countries; an example of distant past is Vietnam and recent past are Afghanistan and Iraq. The irony is that the US never accepts its defeat and never declares that war is over. It continues to support various rebel groups in war-torn countries and the most notorious examples are Afghanistan, Iraq, Syria and Libya.

One may wonder, why should the US initiate war? My reply is simple, it has to sell its arms and to conclude huge transactions first it creates rebel groups and then sells arms to the incumbent groups. The most notorious groups of present time supported by the US are Taliban and ISIS; other groups may also be working in different countries.

Kindly allow be to refer to Saudi Arabia that lately emerged as the biggest buyer of arms in the recent past. The US supported it by taking price of crude oil to US$147/barrel. In the meantime the US also increased its rig count to above 1900 to attain self sufficiency in indigenous crude production.  To the viability of indigenous producers, the US funds plunged crude price to US$35/barrel.

The US not only caused huge economic losses to Saudi Arabia but has lately withheld supply of arms on the please that these are being used in Yemen. I may laugh at the US acts because over the years it was fully aware that arms were being used by Saudi Arabia in Yemen. It concluded the deals, took the money and now not honoring its commitments.

Pakistan stock market witnesses bullish trend despite selling by foreigners

Pakistan Stock Exchange (PSX) continued its upward move during the week ended 16^th December 2016. This bullish performance was led by calming political uncertainty over Panama paper and strong oil prices post Saudi Arab led deal, resulting in higher crude oil prices. This propelled gains in the index heavy Oil & Gas sector. However, activity at the bourse tapered 9%WoW with average daily volume at 357.6 million shares and volume leaders being second tier scrips like PIBTL, ASL, BOP, TRG and EPCL.

Key news flows during the week included: 1) US Fed increased interest by 25bps to and also hinted towards further increase in next calendar year, 2) a Chinese firm showed interest in participating Nishat Energy Limited (NEL) plan of setting up a 660MW power plant on imported coal, 3) ECC of the cabinet reversed its earlier decision to reduce the gas sale price for industrial sector to Rs400/mmbtu. However, it approved reduction in price for power stations and IPPs from Rs613/mmbtu to Rs400/mmbtu, 4) PSMC linked its US$460 million investment in a new Greenfield project with a steep cut in import duties and 5) Fecto cement decided to participate in bidding for Dewan Cement.

Performance leaders during the week were: POL, PPL, MEBL and SNGP; while laggards included:  AGTL, FATIMA, FFBL and LUCK. Foreigners remained net sellers for the week, where outflows stood higher at US$46.8 million as compared to US$24.8 million last week.

Oil stocks will likely remain in limelight, following the OPEC and Non‐OPEC members’ decision to cut output and manage supply. Moreover, expected announcement of the textile policy next week will keep the sector in focus. On the political front, easing noise after Supreme Courts adjournment of Panama Leaks case hearing till January’16 is likely to remain positive for the market.

Beating expectations of analysts, Habib Bank (HBL) posted hefty increase in 3QCY16 earnings of 40%QoQ took 9MCY16 earnings to Rs17.47/share. The focal point was improvement in asset quality that came under considerable stress following the slowdown in GCC economies in CY15 raising concerns on further infection of its international exposure. However, with provisions going down by a substantial 67%YoY in 9MCY16 on the back of Rs336 million reversal in 3QCY16 (first after 2QCY14), analysts are now more optimistic on the bank's asset quality metrics. HBL's price performance has been driven by a confluence of factors such as: 1) Pakistan's inclusion into MSCI EM space, 2) interest rate cycle reversal drawing close and 3) a resilient earnings profile.

Recently released data by Pakistan Automotive Manufacturers Association (PAMA), Pakistan's total industry sales for November'16 grew by almost 12%MoM to 17,858 units, still below 19,029 units sold in November'15 – thanks to unchecked import of used cars. Car and LCV sales rose to 16,018 and 1,840 units respectively, up 10.8/19.9%MoM but down 2.9%/36%YoY pointing to the continued influence of the Rozgar scheme on industry sales growth. Taken as a whole, 11MCY16 sales showed a tepid decline of 9% YoY to 187,591 units sold under all segments. Cars/Tractors posted minor falls of 2.9/3.0%YoY to 163,339/39,170 units sold over 11MCY16, while LCV sales dipped 36%YoY to 24,252units. Three major OEMs remained within their seasonal trends, where HCAR was an outlier, with sales growth of 3.2%MoM/103.3%YoY (unit sales of 3,096units during November'16) driven by the new Civic. Additionally segment‐wise growth showcases a burgeoning demand side scenario for the 1000CC segment where cumulative sales for 11MCY16 were 26,128units up 28%YoY, while the 1,300CC and above segment sales of 84,769units experienced a slowdown, recording growth of 3%YoY as against 40%YoY growth experienced in the same period last year. 800 and below 1000cc segment experienced a decline of 20%YoY selling 52,442units during the period. Citing the launch of Revo/Fortuner variants, followed by resilience of the Corolla, superior operations and hedging of currency risk (60% localization, active hedging of order book).

In line with the broader textile sector that has been in limelight on account of the 1) upcoming textile policy, 2) inclusion in the zero‐rated tax regime and 3) implementation of new efficient refund mechanism, Nishat Mills (NML) remained in focus. Pakistan’s leading brokerage house, AKD Securities has lowered the portfolio discount to 40% (from 50%) on the back of improved trading volumes and betas of portfolio companies that face lower volatility, while improving the liquidity of NML's portfolio. The earnings profile remains encouraging with earnings growth of 26%YoY in FY16. Going forward, brokerage house expect profitability to remain strong that includes 22%YoY growth in FY17 underpinned by: 1) marked improvement in core operations on expected improvement in gross margin on account of improved production efficiencies and grant of zero‐rated regime, along with 2% growth in topline and 2) substantial growth in dividend income (up 12%YoY) on expectation of continuation of strong dividend payouts by associate companies.

A wake up call for ruling junta of Pakistan

Pakistan has an agro-based economy and the country is heavily dependent on imported energy products. As country’s trade deficit is mounting there is need to revisit government policies. The other alarming factors are: 1) extensive borrowing to meet the budget deficit and 2) deceleration in remittances. The added problem is that with the commencement of winter industrial units, particularly textiles units are likely to be a major sufferer and exports of textiles and clothing destined to plunge.

As stated earlier, Pakistan is heavily dependent on imported energy products; any hike in crude oil prices does not bode well for the country, though capital market analysts term the hike good for E&P and downstream companies listed at Pakistan Stock Exchange (PSX). A stronger dollar is likely to keep commodity prices in check, but also expected to make imported commodities more expensive.

Pakistan Steel is closed for months and there are no signs of its commencing production in the near future. Its price has posted 16.4%MoM increase in November, as Chinese producers re-align supply and the government implements a policy of curtailing supply.  This is likely to cause further hike in steel price, which does not bode well for Pakistan

Pakistan is a major user of coal, in cement industry. Coal price drop on Chinese relaxation on mining controls: After reaching a 5-year high, coal price has fallen to US$83.5/ton as the government asked the coal miners to lift up output till the end of end of winter heating season to counter the surging price. The coal price decline has remained slower as the Chinese coal producers were unable to ramp up production quickly due to medium-to-long term supply contracts and time to bring back coal mines into production. Nonetheless, normalizing of seasonal demand post-winters, will likely witness further fall in coal price as China will continue its policy to do away with coal based energy.

Fertilizer is one of the major industries of Pakistan and currently suffers from poor capacity utilization. Added to this is, extremely low international prices of urea, affecting the earnings of local manufacturers. In November its prices rose to US$224/tons as compared to US$201/tons a month ago.  While continuing to recover from lows of US$172/ton seen in July 2015, urea prices remain down 8%YoY as oversupply and weak demand continue. On the domestic front, recovery in international prices is likely to enhance pricing power of local manufacturers, who are already plagued by lower off-take. However, further recovery in off-take remains more likely to be a product of price reduction.

Global cotton prices during November remained higher as compared to last year (up 14%YoY) on the back of continued price recovery. The monthly USDA report featured an increase in global annual production up to 103.3 million bales and virtually no change to world mill-use, resulting in additions to global stocks. Following the global trend, prices in the domestic market remained on the higher side in November. Despite higher-than-expected phutti arrivals, prices of quality cotton move higher because of sustained buying by mills and spinners. Moreover, temporary ban on cotton import from India kept demand of local cotton robust.

This year Pakistan is likely get another bumper crop of wheat but of no benefit. While the surplus can’t be exported, post harvest losses are feared to increase due to inadequate storage facilities. Lack of supporting policies has failed in attracting investors to construct modern warehouses and collateral management companies. Absence of modern silos results in up to 20 percent post harvest losses. Saving this could boost income of farmers and also bring down price of staple grain n the country.

Curtailing oil production ‘an agreement of thugs to rip off consumers’

Without mincing my words I will prefer to call recent agreement of OPEC and non-OPEC members to cut output ‘an agreement of thugs to rip off consumers’. They have agreed to cut output but still don’t trust each other. They even go to the extent of calling each other ‘cheater’. Therefore, some of the members are most likely not to abide any production limited. The business will continue as usual because consumption of energy consumption will increase with the commencement of winter. However, the level of consumption will remain dependent on the drop of mercury level.

Let me explain my assertion that the US and Saudi Arabia were partners in taking oil prices up to US$147/barrel. In fact Saudi Arabia fell in the trap because it was overwhelmed by the hike in price. Although, I fell that I am not competent enough to say this, but just can’t resist from saying. Saudi Arabia just did not bother to look at the number of rigs operating, which exceeded 1900 at one time. The quantum increase in US Shale output helped the country (US) in becoming self sufficient in indigenous oil production. The US is no longer dependent on imported oil, though it is still importing low cost oil from Saudi Arabia.

In my previous blogs I have discussed different themes that included 1) pressure on Iran to cut output 2) Saudi Arabia asked to make the biggest cut? 3) Iran not a threat to Saudi Arabia but US Shale, certainly 4) attempts to penalize Iran and Russia have backfired. The scenario prevailing since 2014 can be summed up in one sentence, ‘Saudi Arabia kept on pumping maximum oil to maintain its market share. It may have succeeded in maintaining the share but petro income nosed dived, leading to extensive borrowing.

After the withdrawal of sanction imposed on Iran, Saudi Arabia felt jittery and feared losing its substantial market share. It completely ignored another harsh reality that due to over three decades of economic sanction, Iran’s output could not be increased. Though, economic sanctions were also imposed on Russia, it managed to take its output above 11 million barrels lately. That is the reason it convinced Saudi Arabia to agree to cut output because it believes that collectively two countries (Russia and Saudi Arabia) now enjoys power to maneuver oil price. Both of them want to ensure that Shale production does not increase certain level.

I will also say that geopolitics play a key role in the supply of oil. Some of the most obvious examples are Nigeria, Libya and Iraq. As and when a reduction is desired, output in these countries is disturbed. This time the issue of pipeline in the US has also affected shale output.  Therefore, the readers may also agree with me that oil output and its prices are controlled by a few thugs; they may appear foes but have common agenda, keep the world under their control.

Pakistan stock market benchmark Index inching towards 46,000

Continuing its strong run, the benchmark of Pakistan Stock Exchange marked another stellar week ended on 8^th December 2016 and closed at 45,387 levels. The rally was driven by high oil prices, continued expansions in industrial sectors and announcements of corporate actions. LUCK announced plans for entry into automotive business through setting up manufacturing plant in partnership with Kia motors, furthering operations in Iraq while expressing intention to bid for DCL's assets, keeping sentiment strong. Other announcements included TREET and ICI’s plans to invest in the pharmaceutical sector, Shanghai Electric sharing a US$9 billion investment plan following KEL’s acquisition and BoD approval of MCB and NIB merger. Additional key news flows included: 1) Continuation of Supreme Court hearings of Panama case, with PM Sharif facing criticism from the court for failing to provide a money trail for asset purchases, 2) GoP raising Rs147 billion through Treasury Bills auctions where cut‐off yields remained stable, 3) cotton arrivals increasing 13.8%YoY for the season, 4) delay in bid opening process for the 40% divestment of PSX and 5) CCP imposing a penalty of Rs150 million on PSO for deceptive marketing. Market leaders during the week were: LUCK, ICI, PIOC, FCCL and AICL; while laggards were: ASTL, EPCL, HASCOL, PSMC and LOTCHEM. However, activity at the Exchange tapered 15.3%WoW with average daily trading volume of about 393 shares. Foreigners remained net sellers for the week, though outflows stood lower at US$24.8 million as compared to US$33.5 million a week ago. Oil stocks is likely remain in limelight as the next week kicks off, following the OPEC and Non‐OPEC meeting to decide on oil output cuts set for tomorrow. Moreover, the US FOMC is scheduled to announce monetary policy next week, with broader anticipations of a 25bps hike in Federal Funds Target Rate (FFTR). However, Fed’s outlook for FFTR trajectory in CY17 remains a risk event for global markets. Resurgence in political noise on Panama case developments remains a possibility, to potentially force some profit taking next week.

The US FOMC is largely anticipated to increase the fed rate in its upcoming monetary review next week  that coupled with a surge in inflationary expectations post Trump victory has pushed the greenback to its 14-year high. Within this context, the upcoming meeting retains particular importance as Fed's economic projection for future rate trajectory can alter the dollar outlook. While most regional currencies have witnessed erosion against US$, the PkR/US$ parity has held its ground. Moreover, GoP's ongoing drive to normalize kerb‐rates is a strong signal of its policy to maintain currency stability. However, going forward analysts fear some decline due to: 1) exports weakness amid lower currency competitiveness in the region, 2) higher oil prices adding to import bill and 3) potential delays in foreign debt flows to support foreign exchange reserves.

We revisit our investment case of LUCK as it has formally announced to further expand its business portfolio. The new list of projects comprise of: 1) setting up of manufacturing plant of Kia motor vehicles, 2) expressing interest in acquiring DCL's 1.134 million tpa Hattar plant, 3) doubling capacity of Iraq JV to 1.742 million tpa and 4) indirect additional exposure in the pharmaceutical business through its subsidiary, ICI (expressed interest in acquiring certain assets of Wyeth Pakistan Ltd). Assuming the DCL acquisition is successful, LUCK's earnings can increase depending on DCL's post acquisition performance. Whereas, doubling Iraq JV's capacity can result in incremental earnings.

Up-gradation of prevailing MOGAS standard (from 87RON to 92RON) and the accompanying launch of high octane variants by OMC's has rejuvenated the drive for volumetric sales growth, as seen in the November’16 figures released by OCAC. Running a preliminary market sizing analysis, some analysts ascertained the impact of these fuels (reportedly deregulated but an official notification is still awaited) on SHELL, HASCOL and PSO's earnings. Moreover, deregulation resonates positives for OMC's, namely: 1) additional cushion against wild swings in cost of supply, as increased costs can be passed on without a lag and higher margins raise earnings profile and 2) low receivables in motor fuels segment, increasing avenues for growth steering clear of liquidity pangs.