Increased cotton output

It has been a roller-coaster ride for the cotton industry in the last few years and from a position of shortage and hoarding, the market is today flooded with cotton as most cotton growing countries including India have seen good yields; and China, which is a major importer of cotton, has put a blanket ban on the imports, determined to first use last year’s surplus. In reaction to the glut situation and coupled with India’s increased cotton output…, the prices have come down, leaving the Indian industry in a flux as to the next course of action. Apparel Online talks to market leaders on how this scenario will impact the garment manufacturers and the yarn producers and also the way forward…, buy and stock, or go with the wind…

There is a complete consensus that the current situation is favourable for garment manufacturers, as prices of cotton and yarn have fallen steeply. Industry stalwarts point out that though elasticity of garments’ prices to yarn is there, however, it is not fully adjustable and reduced cotton prices have already started reflecting in the fabric prices and the same will be passed on further in the chain. As for the impact on yarn producers, industry watchers admit that it is too early to make predictions as the same depends on many factors. “Since the margins in yarn have already dropped in anticipation to the lowering of the international prices, I do hope that the exports of yarn from India will improve in the time to come. However, it will depend upon how much reduction in the prices of cotton happens in the country and what will be the dollar-rupee relationship,” says SP Oswal, Chairman of Vardhman Group.

Over the last few months, yarn producers have been forced to sell at extremely low prices to keep themselves free of too much stock – hence have suffered losses but many anticipate that it will not remain the same. Sanjay K Jain, MD, TT Ltd. opines, “Going forward I feel that demand has to pick up, the poor off take was more due to the bearish sentiment of cotton which made people eat up their pipeline inventory and minimize inventory losses. However, by November/December once cotton hits MSP levels – buyers would come to buy, to build up normal stock levels and also for consumption. Hence we are close to the worst for yarn manufacturers – there is no fundamental weakening of demand globally, though growth rates are modest. However local growth rates are expected to pick up as the economy revives.” There is agreement on the fact that workability will come into play on the new cost prices.

Since Indian mills see Bangladesh as a big customer, the changing scenario is equally important from the Bangladesh perspective, more so as the country has considerably developed its own spinning capacity over the last decade. Stalwarts feel that India will continue as a favourable supplier to Bangladesh, however with the country facing some serious growth issues particularly to the US and some of their orders shifting to India, there could be a drop in demand for yarns. If the Europe FTA with India happens, the shift in business would be much more significant.

In the meanwhile, garment exports in India have been doing well over the last 12 months. “We can definitely look at Bangladesh as a back-up market for our textiles. However, payments from there remain a concern for the Indian companies. This is the reason that the yarn exporters will exercise caution rather than go all out,” says Purushottam C Mandhana, Chairman, Mandhana Industries.

Many in the industry are confused…, should they buy and stock, or go with the wind. Actually it depends upon the strategy of each mill/garment exporter, their product-mix, market base, quality perception in the minds of the customer and several other factors. “I don’t find it easy to answer this question, however I can say that once equilibrium is achieved in prices then that may be the time to buy,” suggests Oswal. While Sanjay is of the opinion, “Go with the wind – stay slim and fit. Buy as you need – after mid November to early December would be the time to increase stock levels to ensure  smooth flow of operations.”

Adds T. Rajkumar, Chairman, SIMA, “I would like to advise mills to avoid panic selling as cotton yarn export registration has already reached 130 million kgs during August 2014 as against 72 and 83 million kgs for June and July 2014, respectively and also the momentum has been building up since September.” On a practical note Mandhana concludes, “The prices are on a downward swing. In such a scenario we’d like to go with the wind rather than buy and stock. Also the demand that will generate vis-à-vis yarn counts is not clear at the moment, so we would like to buy when required.”