Poland update – economic and political reforms affect Polish cotton textile industry in consumption, trade, production, and development

Poland update – economic and political reforms affect Polish cotton textile industry in consumption, trade, production, and development – U.S. Dept. of Agriculture, Foreign Agricultural Service report

Brian Goggin

In September 1989, Poland adopted comprehensive economic and political reforms in an ambitious attempt to quickly convert to a free market economy. The reforms are widespread and include; a shift to real market prices from government-determined prices, the removal of trade barriers, privatization of state enterprises, and the creation of a competitive banking system. The sudden impact of the reforms has left many Polish industries, including the cotton textile industry, struggling to reorganize in order to successfully compete. Poland’s cotton textile industry has fallen, along with the general economy, into a severe recession. Many Polish cotton textile producers are struggling primarily because the previous economic system depended on a fundamentally closed and captive domestic market. The closed domestic market provided stable demand for the industry’s products, but shielded Polish cotton textile manufacturers from imports of cheaper, more fashionable cotton products. Furthermore, the shift to real market prices resulted in increasing prices for locally produced cotton products. As a result, demand has been significantly reduced. Conversely, imported products were able to compete successfully with locally produced cotton textiles. Polish imports of cotton textiles and finished cotton products have substantially increased since the introduction of the reforms. Also, the previous system depended on trade with the USSR and other Eastern European countries using long-term contracts and nonconvertible currencies. These structured trading relationships provided additional stability but did not prepare the Polish cotton textile industry for the uncertainties of free market trade. The industry’s problems are compounded by the previous system’s dependence on administrative incentives. Managers in the cotton textile industry, and other industries as well, must now learn to cope with the uncertainties of a free market system. The consequence of the previous system’s closed market, structured trade, and dependence on administrative incentives is a textile industry struggling to adjust to a demanding international market. The industry must now learn to provide timely deliveries of competitively priced and fashionable products. Although the rapid pace of the industry’s reorganization can make information obsolete, a brief review of present conditions may provide a clearer understanding of the industry’s challenge. The remainder of the update will describe macro-economic problems, the industry’s structure, raw cotton imports, and prospects for the future, followed by an analysis of prospects for U.S. cotton exports to Poland.

Macro-economic Problems–Debt and Inflation

Macro-economic problems, particularly Poland’s international debt and inflation rate are formidable obstacles to the cotton textile industry’s development. Poland’s outstanding international debt is approximately $20 billion, equivalent to about 15 percent of the estimated 1990 gross domestic product. The debt prevents the new Polish Government from assisting the cotton textile industry with investment in new equipment. The industry must now depend upon retained earnings and foreign direct investment to help achieve international competitiveness. Additionally, the inflation rate in 1989 skyrocketed to almost 600 percent, but has recently leveled to an annual rate of approximately 60 percent. Trade sources indicate that interest rates offered by Polish financial institutions are currently 6 to 7 percent per month. Gaining control of inflation is consequently a high priority of the new Government.

Industry Structure

The structure of the Polish cotton textile industry is currently marked by large, vertically integrated, and state-owned textile mills. The industry will likely re-organize into smaller, more specialized, and privately owned textile mills as the industry adjusts to the market-oriented reforms. Although there is an effort to privatize nearly all sectors of Polish industry, no textile mill is currently privately owned. Trade sources indicate that private investment is needed if the Polish cotton textile industry is to upgrade equipment and improve production techniques. There are currently 30 operating mills in Poland. These mills have a combined estimated capacity of approximately 1,300,000 ring spindles and 188,000 open-end rotors. The average textile mill in Poland has nearly 50,000 spindles, a generally high level of industry concentration. The concentration of the industry into large mills (in an attempt to achieve lower per unit production costs) was characteristic of the previous economic system. Industry analysts foresee the development of more efficient mid-sized organizations as crucial to the Polish cotton textile industry’s future. Vertical integration is a term commonly used to describe organizations that engage in several processing and distribution activities. It is characteristic of textile industries throughout Eastern Europe. Vertical integration in Poland’s textile industry is evident by the lack of specialization, especially in spinning. Of the 30 textile mills in Poland, only three are solely spinners. The remaining mills further process raw cotton into fabric and finished cotton products. Industry analysts expect that the Polish cotton textile industry will gradually adopt more specialized production organizations.

Outlook for Raw Cotton Imports

During the mid-1980’s the Polish cotton textile industry imported 700,000 to 800,000 bales of raw cotton, primarily from the Soviet Union. Other important suppliers included Turkey and Greece. Polish mills drastically reduced their raw cotton imports from all suppliers, beginning in the 1989/90 marketing year. Imports fell from a record 818,000 bales in MY 1988/89 to 652,000 bales in 1989/1990. Imports during the current 1990/91 marketing year are estimated to fall further to 322,000 bales. For the 1991/92 marketing year, trade sources indicate that Poland’s raw cotton imports may recover slightly. Cotton import transactions were previously directed by TEXTILIMPEX, a state-operated trading agency. Since the recent reforms, however, many new private trading agencies are in business. TEXTILEIMPEX remains, however, the major cotton importer.

The Polish Cotton Textile Industry’s Prospects

The severe recession has reduced mill consumption to half of the 1988 levels, with many mills operating 2 weeks out of every four. Although no mills have closed in the last 6 months, trade sources indicate that the less efficient cotton textile producers face limited prospects for survival. The short-term outlook for the Polish textile industry includes continued adjustment, lasting well into 1992. A successful industry re-organization, however, along with the continued adoption of free market economic policies will lead to an efficient and growing textile industry.

Outlook for U.S. Cotton Exports

U.S. cotton exporters were minor suppliers to the Polish market during the 1980’s, supplying generally only 5 to 7 percent of Poland’s cotton import requirements. If U.S. cotton remains competively priced, trade sources indicate that U.S. exporters can reasonably hope to gain a 20-to-25-percent share of Polish raw cotton imports in the 1990’s. In the long term, USDA export credit guarantees and P.L. 480 consessional sales may be an important factor in further increasing U.S. market share of Poland’s raw cotton imports. Prospects for increased U.S. exports under regular commercial arrangements have improved recently, since the Soviet Union now requires hard currencies in export transactions. Previous long-term arrangements with the Soviet Union using convertible rubles provided Polish mills with a secure source of raw cotton supplies. Other Soviet supplies were also acquired through barter arrangements. Although trade sources indicate that Polish textile mills may continue to barter for Soviet cotton under special arrangements, the change in trade terms may provide opportunities for U.S. cotton exporters.

Brian Goggin, Cotton Analyst for Europe and the Middle East, Tobacco, Cotton, and Seeds Division, Foreign Agricultural Service, USDA.

COPYRIGHT 1991 U.S. Department of Agriculture

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