Thomas White Global Investing
Egypt
Egypt Stamp
August 7, 2009
A Postcard from the Middle East
Egypt: Cotton Slumps in Recession Drought

Egypt cotton

The global financial crisis had a powerful impact on the Egyptian textile industry, with cotton consumption dropping almost 40% in 2008.

The city of El-Mahalla El-Kubra would be hard to find on a map. Sitting in the middle of the Nile Delta, the city is home to Egypt’s largest textile factory, where cotton is spun and eventually makes its way to the world’s luxury bedding manufacturers. Egyptian cotton. The gentle white fluff from the land of the Pharaohs and Sphinxes has become a craze over the past several years, prized over others because its long fiber cotton only becomes softer and surprisingly stronger over time.

It was Mohammed Ali Pasha, considered the founder of modern Egypt, who established cotton as a key cash crop for the country, bringing in immense revenues during the American Civil War when the supply of American cotton was blocked. Yet, despite its centuries’ long appeal, the global economic downturn has created havoc for this bedrock of the Egyptian textile industry. Cotton sector sales and output have slid in the face of plummeting demand. Total cotton area and production in 2009/10 is forecasted to drop by 17% to 110,000 hectares, mainly because of declining profit margins for cotton.

Exports are also expected to decrease significantly to 100,000 bales. The culprit remains the world financial crisis, which exacerbated an already struggling industry beaten down by other low-cost producers in Asia, such as India. The cost of cotton production has also risen over the years and waning demand from prime markets such as the European Union have moth-balled growth.

Worryingly, farmers are replacing some cotton areas with other more lucrative crops such as corn and rice. A slowdown in the cotton industry is also bound to create rippling effects in Egypt’s textile industry as a whole. One of the country’s oldest industries, the textile sector accounts for 27% of Egypt’s industrial production, making it the second largest industry in the country after processed food. The government has been trying desperately to reverse this trend, first allocating $58 million for the textile industry in April, and then following up with a promise to pay $0.50 per kilogram for yarn produced from Egyptian cotton.

So far, the measures have been met with lukewarm enthusiasm, although the Egyptian textile industry acknowledges that the problem is more endemic. It seems that much of the textile industry meets its own cotton needs through imports. Egypt’s long-staple cotton is a luxury for the common man in Egypt –the cotton fiber that goes into the T-shirts, skirts and other clothes that Egyptians wear is the medium staple-cotton, which is widely available, and cheaper to make and market. Egypt’s long-staple cotton is a luxury. Woven into the rich bedspreads, comforters, and pillows, Egypt’s luxurious long staple-cotton from the Nile Delta is the ‘crème de la crème’ of cloth.

For long, Egypt has been known to be the colossus among the dwarfs in the cotton world, rivaled only by American Pima cotton. Yet, with the global recession already changing industry dynamics, will Egypt’s position as a preeminent source of luxury cotton be changed as well? Will the cotton craze of the century wither away to a slow death? These are uncomfortable questions that the cotton sector in Egypt must now face. How it survives depends not just on government incentives, but whether the consumer is willing to open its purse strings to experience the exotic luxury of Egyptian cotton once again.

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