Cheap cotton may pose problems

IN FOCUS/ Manmade Fibres

The production of manmade fibres has shown a significant increase in this financial year, even if the loss of production caused by the powerloom producers strike in April 2003 is taken into account.

Evidently, the sector is booming thanks to robust demand but there are problems ahead. During the fourth quarter (Q4) of the last financial year, increasing international prices of cotton and cotton yarn prices led to increase in prices of most manmade fibres.

However, the sector was also exposed to increase in prices of raw materials on account of increasing petrochemical margins as also increase in crude oil prices, resulting in near stagnation in margins of manmade fibre companies.

Since then, crude oil and raw material prices have continued to be volatile, but prices of finished yarn and fibre prices have not increased mainly on account of stagnating cotton prices.

If the current year's cotton crop is good and prices slip drastically, the natural fibre will challenge the market share of manmade fibres in segments where both have identical applications, said analysts.

ICRA said prices of manmade fibres would remain linked with cotton prices.

Cotton prices at the global level are expected to decline significantly and has emerged as a major risk for the sector.

The global operating rates have been high since 2002 mainly on account of shrinking production of cotton and small increases in manmade fibre capacity.

Further, excise duty is higher on manmade fibres vis-a-vis cotton in the domestic market and this has eroded the price-competitiveness of manmade fibres.

Overall, thus margins of manmade fibre producers are likely to remain under pressure in the short to medium term, ICRA warned. This trend is also visible, as all this has put pressure on conversion margins which declined particularly in Q3 ending December 2004 of the current fiscal. Conversion margins in Q3 were hammered by falling cotton prices.

To be fair, the operating profits of manmade fibre producers is also dependent on the conversion margins, which is the difference between the cost of fibres and fibre intermediates, ICRA pointed out.

Both the prices of fibres and fibre intermediates are largely outside the control of Indian manmade fibre manufacturers.

Going forward, the prices of the raw material, fibre intermediates, are likely to remain high on account of high petrochemical margins driven by increasing global operating rates and high crude oil prices.

Profitability would depend on average operating rates of manmade fibre industry both at regional and global levels as well.

Currently, polyester accounts for 40 per cent share of the country's total fibre consumption, and in the domestic market, the share is at over 50 per cent.

The Indian weaving industry finds it difficult to export synthetic fibre-based textile goods though cotton and cotton-blend textiles and clothing are exported mainly on the strength of low prices.

From January 1, 2005, the quotas for textile and clothing exports have been eliminated.

This would mean increased opportunities, but also the end of the safety provided by the guarantee of a quota-based export system.

This would lead to increased competition between developing countries, ICRA said.

Indian manmade fabrics and apparel industry would have to fight imports from developing nations and also fight increasing saturation in the domestic manmade fibres market.