Sunday, October 2, 2011

Eroding cost competitiveness of Nepalese carpet

Due to the rise in the cost of labor, wool, cotton and interest rate, cost of production of carpet has increased by more than 50 percent over the last one year alone. Buyers are not placing orders for next year and if this continues then we might just see the entire industry collapse. Here is a story related to this one by Republica’s Prabhakar Ghimire:

"Whatever rise we witnessed over the last few months is because of the agreements made in January this year. Nepali carpet exporters negotiate and strike business deals in January every year," Kabindra Nath Thakur, president of Nepal Carpet Exporters Association, told Republica.

He said the cost of production is over 30 percent higher than that of Indian carpet, which is the major rival of Nepali carpet in overseas market.

According to Thakur, cost of production per square meter of carpet is around Rs 4,500, which is considerably up from around Rs 3,000 per square meter a year ago. The labor cost has increased from Rs 4,600 per month to Rs 6,200 per month and bank interest rate has gone up to around 15 percent. The cost of wool and cotton has also seen a sharp rise over the last year.

"We are compelled to price Nepali hand-woven carpet at around 70- 80 Euros per square meter. Export prospects are dim, especially in Europe as buyers who are buying our carpet at 40 Euros per square meter are not willing to buy at the new price," said Thakur.

Gopal Krishna Joshi, vice-president of Carpet Producer Association Nepal, said the cost of wool imported from New Zealand has jumped to $6.5 a kg from $4.5 a kg a year earlier. Similarly, the cost of Tibetan wool has increased to Rs 300 per kg from Rs 230 per kg over last couple of months. Cotton, which is an important ingredient for carpet, costs Rs 175 per kg now from Rs 150 per kg a few months ago.  

Nepali carpet producers and exporters are also facing a shortage of skilled carpet weavers, making us unable to fulfill the demand from US market which has improved with the housing sector slowly returning to normal.

Labor strikes and increase labor cost have been the most binding constraint to growth of export-oriented and manufacturing sectors. In fact, labor cost in Nepal is already the highest in South Asia. More about imprudent unions and weak industries here. The strength of industrial sector in Nepal is receding and they badly need relief from labor strikes, power outages, policy inconsistency and increasing cost of doing business, among others. Also, rad my last year’s piece on the demise of garment industry in Nepal.