Cotton Industry at Risk

The Citizen (Dar es Salaam)

Ray Naluyaga

15 May 2011

Mwanza — The Tanzania cotton industry is facing the risk of collapsing if a lawsuit for $2 billion (about Sh3 trillion) compensation filed by overseas buyers for breach of contract is granted.It is feared that local ginners and exporters may not be able to shoulder the hefty penalty demanded by some overseas buyers, a situation likely to lead into a boycott of Tanzanian cotton exports. Local ginners and exporters had entered into contracts to supply a total of 260,000 tonnes of cotton overseas, but the target was missed by 38 per cent, hence managing to afford only 162,000 tonnes.

According to Tanzania Cotton Board director general Marco Mutunga, the overseas buyers subsequently sued at the Liverpool Cotton Association (LCA) for arbitration over the failure to supply cotton as agreed, and demanded $2 billion in compensation.

Mr Mutunga said the failure to honour the contracts was caused by factors beyond the ability of local exporters, such as bad weather, poor administration of the voucher system and the global financial crunch in 2008 that pushed down global cotton prices and disrupted domestic production.

Mr Chama Matata, a lawyer with Matata and Company Advocates based in Mwanza, who also represents some of the ginners and exporters, told The Citizen on Sunday that the row had to be taken to LCA because its rules and arbitration court were the only recognised dispute-settlement machineries under the contracts.

According to Mr Matata, rule 225 of the LCA does not recognise the failure to perform a contractual obligation due to natural calamities, legally known as Force Majeure, which left the local ginners and exporters liable despite the fact that reasons for the failure to supply the cotton was beyond their ability.

“Under normal circumstances Force Majeure is acceptable and a contract becomes frustrated leaving no one liable,” he explained.

But in this case, he said, the LCA rule was the one used to find Tanzanian ginners and exporters in breach of the contract, and therefore required to pay compensation.

The rule stipulates that if for any reason a contract or part of it has not been or will not be performed due to a breach by either party or due to any other reason whatsoever, it will not be cancelled.

“The contract or part of a contract shall in all instances be closed by being invoiced back to the seller in accordance with our rules in force at the date of the contract,” reads Rule 225 of the LCA.

Elaborating, Mr Matata told this paper that the term “invoicing back” in the rule refers to claiming compensation for any loss suffered due to the breach of the contract at the date of closure, which is determined by the difference between the contract price and the available market price at the date of closure.

According to the rules, the “date of closure” is the date when both parties knew or should have known that the contract would not be performed.

When this happened, the price of cotton had locally shot up from Sh600 per kilo, at which the ginners had closed the contracts, to Sh1200, due to high demand at the world market that prompted the prices to rise unexpectedly, following supply shortages in India and Pakistan.

The Tanzania Cotton Association (TCA) chairman, Mr William Matonange, also said the failure to supply the cotton was due to bad weather, especially drought.

However, the overseas buyers believe that some Tanzanian ginners deliberately diverted their sales to other highly paid contracts following resurgence in the world prices.

If this argument holds water at the ongoing arbitration at the LCA tribunal, some local ginners and exporters would be liable to a severe penalty, including a complete ban on trading.

To avert the crisis, the TCB under Mr Mutunga was intending to mediate an out-of-court settlement between the ginners and overseas buyers, where the TCA proposed a payment of $350 per tonne in compensation.

Mr Mutunga told The Citizen on Sunday that the proposal sought to have the ginners whose debt does not exceed $50,000 to pay up in one year, while those owing more to be given up to two years to settle the amounts.

“We want this to end before June when the cotton season begins,” said Mutunga.

However a representative of Cotton Distributor Incorporated of Switzerland, Mr Thomas Fille, maintained that his company would not settle for any compensation less than $400 per tonne.

Sources from the cotton industry have told this paper that other companies had demanded compensation of up to $1,000 per tonne and were not willing to negotiate their position.

However, a ginner based in Shinyanga who preferred anonymity, blamed TCB over the dispute, saying they had entered into such contracts following production predictions given by the board.

“Among the key responsibilities of TCB is to make cotton production forecasts after consultations with other stakeholders, such as Tanzania Meteorological Agency… (but) now it is solely us who have to bear the burden for a fault that we did not commit,” he said.

As of September 13 last year, the 13 ginners out of 44 available in the country were owed between $170,000 and $450,000 by the overseas buyers, being the difference between the price in the original contracts and the market value.

Interestingly, the companies claiming compensation had not paid a single sent, as this was to be done upon delivery of the commodity.

According to Mr Matata, cotton contracts are “forward selling” meaning the buyer and the seller enter into a binding contract in which a commodity is bought or sold at the market price of making the contract, but to be delivered on a stated future date in settlement of the contract.

Financial experts say this is usually done in order to hedge interest and exchange rate risks, a system benefiting the buyer more than the seller.

The industry was rescued from imminent collapse during the global financial crisis by the government’s stimulus package, which included nearly Sh22 billion for paying losses suffered by several firms and co-operative unions in the agricultural sectors. The Sh1.7 trillion rescue package during 2009/10, which sought to shield the economy from further devastation from the crisis, also set aside funds for low-interest farm inputs.

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