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Spinning mills face arbitration over cancelled cotton imports
20
Jul '11
Several spinning mills in Bangladesh are facing the prospect of international arbitration over their cancelled orders for cotton imports. The International Cotton Association (ICA) has warned that this could prove “costly and damaging” for the country's spinning industry.

Many spinning mills in Bangladesh cancelled orders for cotton purchase worth over US$ 500 million when the cotton prices fell after skyrocketing in late March. They are now faced with international arbitration and even black-listing as some trading firms have sought ICA's intervention.

Some international cotton suppliers have filed for arbitration with the ICA and are seeking compensation for the lost business owing to last minute cancellation of shipment orders by Bangladeshi cotton importers.

ICA frames rules and bylaws that govern global cotton market. It also has the authority to fine a supplier or a buyer for any violation of rules.

Bangladesh is the second largest importer of cotton, and about one-half of the country's more than 300 cotton importers and spinners face the prospect of being black-listed by the ICA, if they are found guilty in international arbitration.

Cotton prices in the international market came down to US$ 1.50 per pound within a month of its hitting the peak at US$ 2.30 per pound in March 2011. Importers who placed their orders in March were persuaded by their banks to not to open their letters of credit (LCs), fearing mounting losses.

The problem was further compounded by the yarn made available by the neighbouring India and Pakistan at a lower price. Until last year, such a situation would not have created a problem, as EU import rules compelled Bangladeshi exporters to procure yarn locally.

However, the change in the EU Rules of Origin (RoO) clause since January 1 this year meant that Bangladeshi exporters can fetch yarn from other countries, if it is available at a cheaper price there, rather than procuring from local spinning mills.

Under such circumstances, many Bangladeshi spinners thought cancellation of orders as the logical choice. They cite that if they would have honoured import orders at the peak price of US$ 2.30 per pound, they would have made losses in billions of dollars, as the price has now come down to around US$ 1.25 per pound. They further add that even banks would have been put into serious trouble as spinners would have failed to clear their debts.

Editor's note-Price volatility is going to stay. It might even become more frequent in future years. Hence, both importers and exporters need to find ways to deal with it.

Fibre2fashion News Desk - India

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