Chinese cotton reserve auction to impact Indian spinning industry

The auction seeks to cater to, and fuel mill demand in that country and has put India's cotton and cotton yarn exports in a cautious mode

The recent auction initiated by China on reserve cotton to fuel domestic mill demand is set to impact India’s spun yarn production.

According to the latest report by Icra, the offtake by Chinese mills under ongoing reserve cotton auctions in China has put India’s cotton and cotton yarn exports in a cautious mode.

“As the domestic demand growth remains muted, a sustained and further decline in exports driven by increased mill utilisation in China supported by the release of reserve cotton stocks can adversely impact exports and thus warrants a cautious outlook on capacity utilisation,” Icra stated in the report.

 

As per the report, in FY2016, India’s spun yarn production grew at the slowest pace of about 3.2 per cent in the last four years. This slow pace of growth in spun yarn production has been driven by factors like tepid domestic consumption and limited growth in exports.

Furthermore, monthly production and consumption data does not signal meaningful and sustained revival as the total spun yarn production grew by 1.4 per cent in H2FY2016 vis-a-vis growth of 4.9 per cent in H1FY2016.

The Chinese move of cotton reserve auction could also impact margins of the Indian spinning mills going ahead.

“Given the concerns on yarn export prospects due to the expected improvement in mill usage in China, and expectation of firm domestic cotton prices in the near term, under tightened cotton availability, the contribution margins of Indian spinning mills can come under further pressure in the coming quarters. As a result, the outlook on the Indian cotton spinning industry continues to remain cautious,” the report further stated.

This, when despite the sluggish domestic demand, the weakness in the Indian currency during Q4FY2016 and the resulting improvement in export realisations in rupee terms, domestic yarn prices rose in recent times.

The increase in yarn prices was also driven by the impact of firm cotton prices in the backdrop of tightened cotton availability. As the increase in yarn prices was higher than the increase in cotton prices, the average contribution margin in Q4FY2016 was Rs. 79.36 per kg, which was higher by five per cent on quarter-on-quarter (QoQ) basis, though lower by roughly one per cent on a year-on-year (YoY) basis.