Jute bubble, lest it bursts!

Khaled Rab

NORTH Bengal has recently experienced a growth in the number of small to medium sized jute mills, following the closure of Adamjee and other government-owned mills. But a lack of public policy foresight may threaten the viability of these mills and the jute sector as a whole.

The garment sector is often hailed as the saving grace of Bangladesh's economy, given its rapid growth and survival in a competitive market, and its impact on employment, particularly women's participation in the labour force. The garment industry has benefited from very similar economic support mechanisms and principles as those directed to the jute sector earlier on, which on the other hand is now regarded as the economy's vulnerable sector. The difference, however, is that the jute sector has had the added challenge of trying to remain afloat whilst also being burdened by past debts incurred outside the sector.

So why is the jute sector not afforded the opportunity it deserves? The jute sector operates in a very complex market environment and the marginal export revenue has remained a policy dilemma for all governments.

By the early twentieth Century, there were thirty six jute mills operating in Calcutta, which is close to the world's biggest and best supply of source of raw jute -- former East Bengal. By 1947, the number of mills in Calcutta grew to one hundred and seven as a result of the growth in demand for and trade in jute and jute goods. But with the partition of India in 1947, these mills were separated from their source of quality raw jute in former East Pakistan. The government of Pakistan in 1956, in collaboration with private investors and industrialists, proactively started to set up its own jute industries, seeing a real opportunity with readily available supplies of high quality jute. The names of these early mill proprietors live on to this day in the Bangladesh jute sector, including Adamjee, Dawood, Amin, and Nishat.

During 1950s and 1960s, the number of mills expanded, as did loom capacity, to meet the increasing demand for hessian and sacking orders from around the world. Mill machinery and equipments were supplied by a small group of companies including James Mackie and Sons Ltd, Fairbairn Lawson, T.C. KEAY, Low Brothers, and Fraser. During the 1960s, a new product application for jute appeared on the scene -- carpet backing cloth (CBC). CBC was in high demand by the newly founded tufted carpet manufacturing industry in the U.S.A. and Western Europe.

Broad looms were installed for this purpose in newly established and existing mills to meet product demand. World demand for jute goods was expanding annually, with market growth occurring in both the industrialised and developing countries. Hessian and sacking bags formed the bedrock of this demand surge. For India and Bangladesh -- the major exporters of high-demand jute goods, there were years in which the jute goods trade was a "sellers' market." These were profitable years for the mills i.e. without export bonuses or subsidies.

Despite this history and Bangladesh's comparative advantage in the manufacturing of jute goods, experts have argued that the jute sector has been artificially propped up and thereby has diverted scarce resources away from productive use. Other experts have argued that dependence on primary commodities such as jute is harmful to Bangladesh in the long run. A lack of concerted policy action and commitment, however, has impacted negatively on the sector.

The table below shows the comparative position of jute goods production and export of Bangladesh and India from 1971-72 onwards. Figures for Bangladesh from 1982-83 relate to output from Bangladesh Jute Mills Corporation and Bangladesh Jute Mills Association it does not include BJSA.

Yarn started its journey in late 70's and early 80's and currently is a saving grace.

From the above, one can see that the production of jute goods in Bangladesh recorded a significant increase to 554.6 thousand tonnes during 1977-78/81-82. The decline in production started from 1982-83/86-87, dwindling down to only 268.5 thousand tonnes during 2002-03/05-06. The decline in production from the early eighties to recent years was around 286 thousand tons (51.6 percent). Similarly exports from Bangladesh recorded an increase to 496.6 thousand tons during 1977-78/81-82 but declined to only 195.8 thousand tonnes during recent years.

The decline in export volume over the period was an alarming 300.8 thousand tons (60.6 percent). Currently it is 107 thousand M Tons. Production in India, on the other hand, has steadily risen since the early eighties. Indian exports have remained relatively stable, but the domestic market for jute in India is very large.

STAR

Despite the above trends, jute still plays a significant role in the Bangladesh's economy. The sector presents acute dilemmas for government policy makers. On the one hand, it is a substantial employer, and an important source of foreign exchange earning with nearly 100 percent value addition. On the other, it provides a significant source of cash to the farming community.

It is a decentralised industrial activity providing employment in different regions of the country and in some rural areas where manufacturing employment opportunities are few and hard to come by. It also has properties that make it environmentally friendly. Given socio-political and economic considerations in India, Pakistan and later Bangladesh, governments in these countries have assisted, subsidised and supported their jute sectors over the years. In the East Pakistan/Bangladesh jute sector, manufacturing costs typically exceeded sales revenues. To achieve the degree of reform necessary to restore this important industry to viability, political, labour union and community commitments will be necessary and the policy options put up for serious consideration.

Unfortunately, the lack of appropriate policies coupled with poor marketing and a lack of analysis of cost of production has led Bangladesh jute industry, once the largest player , to be relegated to a sacking and tender oriented organisation. This has been the case for some time.

The 2009-10 season is one in which the government can take serious action to avoid bursting a self-created bubble in the industry. Recent data show that the supply of raw jute to domestic jute goods producers is short of demand, and prices are too high for producers to remain viable. The expected demand for raw jute during this season from domestic jute goods producers (BJMC, BJSA, and BJMA) is around 42 lac bales for this season. Up to December, domestic jute goods producers had consumed 25 lac bales.

Total annual raw jute output in Bangladesh is estimated at 50 lac bales. Of this, around 15-18 lac bales is usually exported to jute goods manufacturers in India and elsewhere.

Source: BJMC & Indian statistics

Therefore, this year, given domestic demand of around 42 lac bales, there is likely to be a deficit of around 8-10 lac bales of raw jute for domestic producers. The reason for this deficit is growth of many small scale jute mills from Bogra onwards in North Bengal resulting from the closure of Adamjee and other jute mills. Nobody anticipated this development. The government's initial response was to put a ban on the export of raw jute to accommodate increased domestic demand. On top of this, there were also recent strikes in the Indian jute industry. But these developments did not help domestic producers of jute goods in terms of assuring supply of raw jute. The supply on the market has been insufficient, and the price of raw jute has remained very high -- nearly 50 percent higher compared to the beginning of the season.

It is simply not viable to run the industry on these costs. To make profit is impossible; to break even is a nightmare. Steps need to be taken urgently to ensure the survival of the industry. If carpet backing cloth is sold as patent salvage or for making Hessian bags, the purpose of the product is lost and so are the tufters. Public memory being short, we tend to forget the loss of the largest CBC market in 1980s in the USA. On current trends, sooner than later CBC and Hessian markets in the developed world will probably face the same fate. It is difficult to give prescriptions so late in the season -- particularly if they end up creating more harm than good. I can merely suggest that the factors behind the raw jute supply shortage need to be addressed as a matter of priority. Red alert needs to be declared in terms of ensuring adequate supply of raw jute in the domestic market. Major jute producers in government, such as BJMC, need to analyse more closely cost of production and how this impacts on the viability of the private sector. At the same time one may keep it in mind that efficiency of men and machine makes or breaks the industry and therefore the situation needs to be closely reviewed at that level. The sector has to look at means to achieve greater efficiency if it is to survive.

Bangladesh is neither the largest producer of raw jute nor the largest manufacturer of jute goods in the world we are not a price maker.

Stalin once told M N Roy that the road to Paris lies through Calcutta and Peking -- two grand cities that still cherish socialism. Bill Duncan, the jute king of Europe in 60s told me in 1973 that that the road to jute starts from Khakanapur in Faridpur and Dhanbari in Tangail -- I hope it does not end there.

The author is a jute expert and the views expressed by him are his own and not of the jute commission of which he is a member.

© thedailystar.net, 2010. All Rights Reserved