Rise in yarn production in China expected to hit Indian mills

Challenges ahead for spinning mills

GMT 12:46 2015 Friday ,06 March

Sriyadithatextile - Challenges ahead for spinning mills

Challenges ahead for spinning mills
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China’s decision to raise spending on farm subsidies 10 per cent is likely to boost yarn production in that country, as cotton will be available to Chinese spinning mills at a cheaper rate. This is likely to hit Indian mills catering to the Chinese market.

In the past three years, consistent growth has been recorded in cotton yarn export to China, as so far, mills in that country have secured cotton at higher prices. China is the largest importer of cotton yarn in the international market. It is estimated in the recent past, cotton yarn export to China accounted for half of India’s overall exports of the commodity.

S P Oswal, chairman of Oswal Group, expects a fall of about 20 per cent in yarn export to China this year. “The demand for cotton yarn from China might come at razor- thin margins, which many Indian companies might find unviable. Those who cannot afford to export at such prices might not be able to sustain. Our mills have sufficient capacities but are underutilised due to power shortages,” he says.

In anticipation of high demand from China, Indian millers ramped up capacities in the past three years and, consequently, dwindling demand will hit their bottom lines, he adds. For 2014-14, cotton yarn exports are projected at 1,000 million kg, and this is expected to decline in 2015-16 if demand from China is low.

Hardyal Singh Cheema, managing director of Cheema Spintex, a major yarn exporter, is keeping his fingers crossed. Though a record cotton crop of 40 million bales (one bale=170 kg), compared with 37 million bales in 2013-14, could benefit the spinning sector, mills will record losses if demand from other countries declines. Now, Cheema is considering other destinations such as Vietnam, Cambodia and Latin America, though he feels their volumes cannot match demand from the Chinese market.

The Confederation of Indian Textile Industry (CITI) recommends companies focus on the domestic market. D K Nair, secretary-general, told Business Standard it might be an uphill task, as despite a good cotton crop this year, opportunities will be few.

There is, however, a silver lining: The Centre has, in the revised technology upgrade scheme for the 12th five-year Plan, stressed revival of the fabric sector. As garment exports rise, the right strategy and attention to fabric manufacturing could help consolidate the entire value chain. “We export about a third of our cotton and an equal proportion of cotton yarn. This could be used in the domestic sector to raise our share of garment exports in the global market,” says Nair.

Domestic demand for cotton has been increasing five-seven per cent a year.

An analyst said though millers might see supplies exceeding demand in the short term, resulting in lower recoveries, emerging markets might present new opportunities in the long run.

Raw cotton exports are expected to plummet around 20 per cent in the next crop year, with demand from China fading, as Beijing unwinds a controversial stockpiling scheme.

That would be greater than the nearly six per cent drop touted for this year, with the change in Chinese policy coming on top of rising cotton consumption in India and a spurt in exports of finished yarn, industry officials said.

Cotton markets around the world have been watching closely, as China abandons a stockpiling scheme under, which it has amassed more than 10 million tonnes (mt) of the fibre - around 60 per cent of global cotton inventories.

The policy had driven up import demand by removing cotton from the domestic market and pushing up local prices.

"Cotton exports have been falling year-on-year and we will not be able to export more than 7-7.5 million bales in 2014-15" said M B Lal, managing director of Shail Exports and former chairman of the Cotton Corporation of India. The country's cotton year runs from October to September.

China, the world's largest cotton importer, accounts for more than 60 per cent of total raw cotton exports from India. The rest goes to Bangladesh, Pakistan and Vietnam.

India, the world's no2 producer and exporter of cotton, has shipped a total of around 8.2-8.5 million bales so far in 2013-14, expected to grow to around 9.2-9.5 million bales by September, industry officials said. Due to harvest cycles, the vast majority of exports typically occur in the first half of the Indian crop year.

The nation exported 10.1 million bales in the 2012-13 year, falling from 12.9 million bales the year before.

China in February imported 147,317 tonnes of cotton from India, down 20 per cent from the previous month. Beijing in January announced it would scrap cotton stockpiling, instead trialling direct subsidies for farmers.

"Chinese buyers have significantly reduced their buying from India in the past two months, as they are waiting for more clarity on the cotton policy in their home country," said Rahul Jitendra Shah, managing director of Acme International.

In a bid to speed up stockpile sales, China from the start of this month lowered the state sale floor price.

Meanwhile, consumption of raw cotton by Indian mills has climbed to 25.8 million bales in 2013-14 from 25 million bales a year ago due to rising demand from textile makers as the global economy shows signs of picking up.

"Consumption by cotton in mills is increasing sharply in India, as many new spinning units are coming up to meet rising demand from textile makers," said Arun Kumar Dalal, a cotton trader from Ahmedabad.

"In the next crop year, mills' consumption is expected to touch 30 million bales." In 2011-12, demand from mills totalled 22.3 million bales.

And Indian shipments of yarn, a value-added product used by textile mills, are likely to rise by around 10 per cent in the financial year 2013-14, market participants said, further crimping overseas demand for raw cotton. Some Chinese buyers have stepped up yarn purchases to avoid higher taxes on raw cotton imports.

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