Market and
Trade Data
Indonesia’s Textile Industry
Provides Material Market
for U.S. Cotton
September
2005
By Christopher Rittgers and
Rosida Nababan
Like most
business sectors in Indonesia, which continue to struggle in
an uncertain business climate, many textile companies faced
ups and downs in 2004. But despite the problems, general
prospects for the textile sector are encouraging. In calendar
2004, exports of Indonesian textiles and related products
reached about $7.3 billion, up 5 percent from the previous
year, and textile exports remain the largest non-oil,
export-based contributor to national income.
| In marketing year
2004, Indonesia was the fourth-largest foreign market
for U.S. cotton, with sales of 1.13 million bales, up
about 35 percent from the previous
year. |
Off With the Old,
On With the New
While there were many positive developments
in the sector, in general calendar 2004 proved difficult,
particularly for Indonesia’s least productive textile
operators. Some mills shut down, and others had to cut back
significantly on production. Indonesian textile mills are now
running at about 80 percent of capacity.
Most textile
companies face similar constraints: difficulty in obtaining
credit and trade financing from banks, increasing operational
costs (for oil, electricity, terminal handling and so on) and
dependency on imported raw materials (such as cotton, yarn,
fabric and machinery).
Indonesia
continues to face stiff competition from other textile
exporters, especially China, and imports of low-priced
finished textile products into the country have hurt the
domestic industry. Furthermore, generally unstable economic
conditions have hampered Indonesian consumers’ purchasing
power and have limited domestic demand growth.
Adaptation
Nonetheless, most
Indonesian mills have succeeded in finding ways to survive and
compete, especially export-oriented companies. Some mills have
changed strategy from operating in all sectors (such as
integrated spinning, weaving and garment fabrication), to
focusing on one or two areas in which they excel. Some are
concentrating on high-end markets and looking for new markets
abroad, instead of attempting to compete on a price basis with
China, India and Pakistan.
Most Indonesian
textile companies realize that they need to upgrade their
equipment and facilities to produce high-quality products
efficiently. Expansion is slow, however, partly because of
limited domestic financing. The Indonesian banking sector has
still not fully recovered from the regional financial crisis
in the late 1990s, and many of Indonesia’s larger textile
companies continue to be heavily debt ridden.
Raw, Intermediate
Goods Interwoven With Industry
The Indonesian
textile industry imports almost all of its cotton needs. In
marketing year 2003 (August 2003-July 2004), Indonesian cotton
consumption fell about 5 percent from the previous year
to 2.15 million 480-lb. bales.
But export
markets grew slightly in marketing year 2004, and total cotton
consumption is estimated to have risen about 4 percent to 2.25
million bales. Consumption for marketing year 2005 is
projected at 2.3 million bales. Imports could trend upward if
high world oil prices affect prices for polyester and other
synthetic yarns.
Indonesian yarn
and fabric production grew by 3 percent in calendar 2004. The
domestic yarn market remains depressed, in part because of
competition from low-cost yarn from Pakistan. Sixty percent of
Indonesia’s yarn production goes to domestic producers of
fabric and garments, most of which are subsequently exported.
Indonesian garment production rose about 11 percent in
calendar 2004. Indonesian spinners currently keep around two
months’ worth of cotton in stock.
U.S. Cotton
Integral Part of the Fabric
The outlook for U.S.
cotton in this market is positive, buoyed by competitive U.S.
prices and increased Indonesian demand for cotton in export
products such as denim. U.S. cotton supplied about 50 percent
of Indonesia’s total domestic consumption in marketing year
2004; Brazil, India and African countries also increased their
exports.
In marketing
year 2004, Indonesia was the fourth-largest foreign market for
U.S. cotton, with sales of 1.13 million bales, up about 35
percent from the previous year. The Export Credit Guarantee
Program (GSM-102), once an important means of facilitating
U.S. cotton sales to Indonesia, has played a declining role
lately and was used to underwrite only 10 percent of sales in
fiscal 2004. Restructuring of USDA’s export credit programs
may further limit GSM-102 use in this market.
Traders note
that the comparatively long shipping times (averaging one
month) for U.S. cotton to reach Indonesia hinders trade. In
contrast, Australia, China and other exporters offer more
flexible contracts and more frequent shipping. The future
position of U.S. cotton in this market will hinge on its price
relative to supplies from other countries.
Indonesia’s
imports of cotton yarn dropped about 30 percent in calendar
2004, but imports of cotton fabrics rose 7 percent. Pakistan
and China remained the major yarn suppliers (with market
shares of about 30 and 20 percent, respectively). China and
Hong Kong were the major suppliers of cotton fabric. The
United States ships almost no cotton yarn or fabric to
Indonesia.
Indonesia’s
cotton yarn exports declined about 15 percent in calendar
2004. But yarn production is growing, and exports are expected
to recover in 2005. Cotton fabric exports held
steady.
The major
foreign markets for Indonesia’s cotton yarn are Japan, Hong
Kong, China and South Korea, with only about 4 percent
destined for the United States. Italy, Bangladesh, Japan and
Hong Kong are the major markets for Indonesian cotton fabric,
while the United States is the top destination for
garments.
Policy Changes
and Challenges Intertwined
In accordance with the
Uruguay Round Agreement on Textiles and Clothing, all quotas
on textiles and apparel were removed for all members of the
WTO (World Trade Organization) on Jan.1, 2005. Indonesia
attempted to delay removal of the international textile quotas
because the government was concerned about declining market
share for Indonesian textile products in the United States and
competition from China. However, many Indonesian companies
think the new non-quota system creates opportunities for
expansion and encourages greater efficiency, quality and
productivity. The end of the quotas will likely bring more
Indonesian yarn and fabric into the U.S. market.
The United
States, the EU and other countries have imposed safeguard
quotas on Chinese textiles and garments under China’s WTO
accession agreement. These quotas will likely limit damage to
the Indonesian textile industry and help buoy its share of the
U.S. market. To compete with China in the domestic market, the
Indonesian textile association has asked that the import
tariff for garments be increased to 25
percent. Indonesia’s value-added tax discourages its mills
from expanding export-oriented production. Moreover,
procedural requirements often delay the process of getting
refunds based on exports.
Smuggling of
imported textile products and secondhand garments continues to
be a serious issue. Demand for these lower-priced products is
high in Indonesia, giving traders strong incentives to import
them. New documentation requirements have been largely
ineffective in halting import smuggling.
Christopher
Rittgers is the attaché and Rosida Nababan is
an
agricultural specialist in the FAS Office of Agricultural
Affairs in Jakarta, Indonesia. E-mail: fasjkt@cbn.net.id | 
