EXPORTS of leather and leather products have been on the decline over the last one and a half years.

Businessmen fear the trend may continue until a final victory against militancy in the Northern Areas and restoration of peace and order to make foreign buyers feel safe to visit Pakistan.

However they hope that a gradual pickup in global demand after the easing of recession in major economies may help boost exports in the second half of this FY.
During July-December 2009, the combined exports of leather and leather products (minus footwear) fell to $368 million from $488 million in the same period in a year-ago. Export earnings from leather products including garments and gloves that had reached $1.1 billion in FY08 fell more than 33 per cent to $834 million in FY09 as global demand slumped in the wake of recession and because of worsening domestic problems.

"Exports of leather and leather apparel have slumped as global demand is still weak and developed economies are struggling to recover from recession," says Mr S. M. Muneer, a former president of the Federation of Pakistan Chambers of Commerce & Industry (FPCCI).

He cites better performance of Chinese, Indian and Bangladeshi exporters as another reason for our lower export earnings from the leather sector.

In six months to December 2009, export volume of tanned leather declined 20 per cent year-on-year to 8.78 million square meters and export earnings also decreased 20 per cent to $134 million. Export of leather apparel and gloves went down 27 per cent to $234 million.

This means that the average unit price remained almost intact. There was some stability in export prices after a gradual recovery in global demand. Margins of exporters who sold their products at competitive prices declined.

Mr Muneer who runs a leading tannery fears that the 12 and 18 per cent increase respectively in gas and electricity charges from January this year may further squeeze the export volumes.

Leather industrialists say, the security situation is affecting their business. "Our buyers are increasingly reluctant to visit Pakistan. Last week one of my clients from New Zealand cancelled his planned trip to Karachi," said Mr Fawwad Ijaz, ex-chairman of Pakistan Leather Garments Manufacturers and Exporters Association (PLGMEA).

"As a matter of routine our clients now prefer to hold business meetings with us outside Pakistan which increases the cost of doing business. Besides, it emboldens our competitors in China, India and even in Bangladesh to take away our clientele."

Tanners point out that India and Bangladesh do not produce better quality leather as compared to Pakistan, yet many multinationals are investing in those countries taking advantage of lower workers' wages and cheaper electricity charges as well as other country-specific incentives to leather industries. That is why India's exports of leather and leather products rose to $3.54 billion in fiscal year to March 2009 from $3.48 billion a year ago despite global recession.

They claim that the cost of electricity in Pakistan is 40-60 per cent higher than in India, Bangladesh, China and Turkey. Leather industrialists demand that the rate of export refinance on leather sector should be reduced and, like in India, the government must announce appropriate grant for investment in technology upgrading, expansion and capacity building.

Leather exporters also say that some of the shipping lines have abandoned their operations in Pakistan and others have reduced the number of vessels passing through Karachi. They have to keep inventory of imported accessories for exportable leather goods for as long as six months. This increases their operational cost and compounds their liquidity problems.

Tanners say that supply of animal hides and skins from the northern parts has also declined by about 25 per cent following the launch of the army action against terrorists there. "This has led to a price hike of hides and skins even at a time when tanneries are running on their full capacity," said Mr Amjad Hafiz, director of Shafi Tanneries in Karachi.

Moreover, some structural problems also continue to impede the growth of the industry. Currently the share of leather and leather products is less then 5.5 per cent of the total export earnings. And their share in global exports of leather and leather products is just around 1.2 per cent despite the fact that there is no dearth of raw material for this industry.

Official estimates reveal that due to rudimentary methods of slaughtering, about one-fourth of animal hides and skins go waste. Most tanneries work with the leather processing technologies imported in 1970s and 80s-and more importantly manufacturers of leather products do not have designing institutes and highly skilled workers capable of producing high value-added products to suit the requirements of foreign buyers.

The three-year trade policy unveiled at the beginning of this fiscal year had promised to provide matching grants to establish designing centres in leather factories but nothing has happened. The trade policy had also pledged to set up research & development centres in Karachi and Sialkot in collaboration with PLGMEA but noting has been done as yet.

And the government had also decided to share 25 per cent financial cost of setting up research laboratories in individual tanneries from the Export Investment Support Fund and to provide matching grant for setting up effluent treatment plants in tanneries. These decisions too are yet to be implemented.

Some leather industries in Karachi claim to have hired a few qualified fashion designers including a couple of Korean experts to help them modernise their production techniques.

Mr S. M. Muneer says in a meeting with Prime Minister Yousuf Raza Gilani he proposed establishment of a fully-fledged ministry of leather and leather products "which is a must for long-term development of the leather sector."

But creation of a separate ministry seems to be a distant possibility. Mr Fawwad Ijaz opines that a substantial air freight subsidy would be in order to boost exports of leather and leather products in the short-run.