 "Cotton yarn spinners cut capacity use as China policy causes domestic glut")
Declining exports of cotton yarn to China have worsened the oversupply situation for Indian spinning mills, who are now looking to domestic demand from the garments sector for relief.
The impact can be seen in the form of lower capacity utilisation in the mills in southern states where, sources say, most of them have resorted to an estimated 20% cut in production.
In April 2014, the Chinese government ended its 3-year-long programme to stockpile raw cotton to support local growers and instead started offering subsidies directly to farmers. With the Chinese government’s decision to offload its reserve stock, spinning mills there can access cheaper cotton from the local market, thus reducing their dependence on imports, which hit Indian exporters in FY2015.
D K Nair, secretary general of the Confederation of Indian Textile Industry (Citi), told Business Standard that while alternative markets Bangladesh, Vietnam and Egypt could offer some respite to the exporters, their base remains small compared to China. Higher exports to smaller nations can offset some loss but the firefighting is on at the end of the millers, he added.
Most of the prominent domestic millers say that the Cotton Corporation of India is hoarding about 8.5 million bales of cotton, or about 20% of the total annual crop which, if offloaded, could ease out the price. At this stage, farmers would not be effected by a correction in cotton price but it would save the spinning sector, the argue.
A mismatch between India’s spinning sector and fabric sector – yarn manufacturing expanded rapidly in the past few years, while fabric manufacturing base remained stagnant – has created a glut in the domestic market making Indian players vulnerable to the export demand, said Nair.
“Despite a good cotton crop and a substantial stock with CCI, the spinning mills are paying for cotton through their nose. The margins have been squeezed due to slow demand and government is not taking any corrective measures to tackle the situation”, said R K Dalmia, Chairman of Texprocil, the Cotton Textiles Export Promotion Council.
“The overall situation may be gloomy but there light at the end of the tunnel. The garmenting sector is expected to do well this year as the demand from Europe and USA is picking up. This may trigger the demand for cotton yarn in the domestic sector,” said T Kannan, Chairman and Managing Director Thiagrajar Mills, Madurai.
According to Krunal Modi, manager (corporate ratings) at Care, “The demand dynamics may change in coming months as new destinations like UAE may translate the recessionary trend into opportunity for garment sector plus the growing demand from EU and USA may perk up the exports. This may happen in 12 to 18 months. (The) Next 3 to 6 months may really test the resilience of the Indian spinning sector.”
He added that FY14 was an exceptionally good year for many cotton spinning units in India due to increasing export volumes and steady domestic consumption along with high average sales realisation. However, the decline in export demand mainly from China is likely to result in moderation in their performance during FY15. Further, cotton spinning units have suffered inventory losses in Q2FY15 and Q3FY15 on the back of decline in cotton and cotton yarn prices.
According to a CARE analysis of the working result published by the top 20 listed cotton spinning companies, they have in terms of sales value reported aggregate net sale of Rs.13,846 crore and PAT of Rs.317 crore in 9 months FY15 as against Rs.13,953 crore and Rs.830 crore in the same period in FY14, respectively, suggesting both muted growth and a fall in profitability.
The impact can be seen in the form of lower capacity utilisation in the mills in southern states where, sources say, most of them have resorted to an estimated 20% cut in production.
In April 2014, the Chinese government ended its 3-year-long programme to stockpile raw cotton to support local growers and instead started offering subsidies directly to farmers. With the Chinese government’s decision to offload its reserve stock, spinning mills there can access cheaper cotton from the local market, thus reducing their dependence on imports, which hit Indian exporters in FY2015.
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China was a major importer of cotton yarn from India with a share of about 46% of Indian exports of the commodity, but that has declined substantially – to an estimated 4% in the first three quarters of FY2015 – undermining the health of Indian spinning mills.
D K Nair, secretary general of the Confederation of Indian Textile Industry (Citi), told Business Standard that while alternative markets Bangladesh, Vietnam and Egypt could offer some respite to the exporters, their base remains small compared to China. Higher exports to smaller nations can offset some loss but the firefighting is on at the end of the millers, he added.
Most of the prominent domestic millers say that the Cotton Corporation of India is hoarding about 8.5 million bales of cotton, or about 20% of the total annual crop which, if offloaded, could ease out the price. At this stage, farmers would not be effected by a correction in cotton price but it would save the spinning sector, the argue.
A mismatch between India’s spinning sector and fabric sector – yarn manufacturing expanded rapidly in the past few years, while fabric manufacturing base remained stagnant – has created a glut in the domestic market making Indian players vulnerable to the export demand, said Nair.
“Despite a good cotton crop and a substantial stock with CCI, the spinning mills are paying for cotton through their nose. The margins have been squeezed due to slow demand and government is not taking any corrective measures to tackle the situation”, said R K Dalmia, Chairman of Texprocil, the Cotton Textiles Export Promotion Council.
“The overall situation may be gloomy but there light at the end of the tunnel. The garmenting sector is expected to do well this year as the demand from Europe and USA is picking up. This may trigger the demand for cotton yarn in the domestic sector,” said T Kannan, Chairman and Managing Director Thiagrajar Mills, Madurai.
According to Krunal Modi, manager (corporate ratings) at Care, “The demand dynamics may change in coming months as new destinations like UAE may translate the recessionary trend into opportunity for garment sector plus the growing demand from EU and USA may perk up the exports. This may happen in 12 to 18 months. (The) Next 3 to 6 months may really test the resilience of the Indian spinning sector.”
He added that FY14 was an exceptionally good year for many cotton spinning units in India due to increasing export volumes and steady domestic consumption along with high average sales realisation. However, the decline in export demand mainly from China is likely to result in moderation in their performance during FY15. Further, cotton spinning units have suffered inventory losses in Q2FY15 and Q3FY15 on the back of decline in cotton and cotton yarn prices.
According to a CARE analysis of the working result published by the top 20 listed cotton spinning companies, they have in terms of sales value reported aggregate net sale of Rs.13,846 crore and PAT of Rs.317 crore in 9 months FY15 as against Rs.13,953 crore and Rs.830 crore in the same period in FY14, respectively, suggesting both muted growth and a fall in profitability.