Cotton spinners in India are considering production cuts during the current financial year to sustain profit margins, which were under pressure due to a sharp increase in the price of cotton over the last few months. Experts estimate an average production cut of 15 per cent for financial year 2017-18, if the current scenario continues.
A recent study by rating agency Care estimates India's cotton yarn production at 3,936 million kg for financial year 2016-17, nearly five per cent lower than 4,138 million kg output reported in the previous financial year. For the past few years, cotton yarn production has increased by 3 -3.5 per cent to meet domestic demand and exports.
India's cotton-spinning industry has been struggling with profitability for over two years due to a sharp decline in yarn exports following a slump in Chinese demand. Chinese textiles mills, which used to manufacture fabric after importing yarn from India, have now slowed down following the government's policy of discouraging energy-intensive industries. This has hit India's cotton yarn manufacturers hard.
"Many spinning mills, especially in the unorganised sector, are struggling with profitability due to a sharp increase in production costs. Not only have prices of raw materials like cotton gone up, labour cost has also risen substantially over the past few years. Interestingly, spinning mills have not been able to pass on the increase in production costs due to weak demand. Though, demand has revived marginally during the past few months, small and medium size spinning mills would have to undergo a production cut for sustainability. While it is difficult to quantify, a cut up to 15 per cent in India's spinning sector is possible," said B K Patodia, an industry veteran and former chairman of the Cotton Textiles Export Promotion Council (Texprocil).
While cotton prices have risen by eight per cent since January 2017 with the benchmark Shankar 6 variety currently trading at Rs 12,035 a quintal, overall cost of production has also gone up by 8-10 per cent. Over 5 per cent appreciation in the rupee over the past three months has also impacted exporters' receivables proportionately.
A recent Care Ratings report, however, estimates a five per cent decline in India's cotton yarn production for 2016-17 at 3,936 million kg as compared to 4,138 million kg for 2015-16. After declining by 10 per cent in 2011-12, cotton yarn production rose by over 14 per cent y-o-y to 3,583 million kg in 2012-13. In 2013-14, production was up by about 10 per cent to 3,928 million kg. High cotton prices and easy availability of MMF (man-made fibres) at competitive rates led to slower growth of cotton yarn production, the report said.
Cotton yarn demand in India grew at a healthy pace in 2015-16, supported by domestic demand and yarn exports. In 2016-17, demand is expected to be sluggish as derived demand and direct yarn exports will be under pressure. Also, with alternatives being explored for crude oil such as shale, prices of crude oil are largely expected to be stable during the year. Hence, demand for cotton yarn is set to face stiff competition from its easily available substitute -- manmade fibres (synthetic yarns).
"When production costs increase, large textile mills change the product mix to maintain margins and maintain the level of operations due to their constant fixed costs. But, small and medium size units normally go for production cuts," said R K Dalmia, President, Century Textiles and Industries Ltd.
An Icra report said that the growth in spun-yarn production, including cotton, blended and man-made spun yarns, declined to a five-year low in FY2017, keeping production almost flat vis-a-vis the previous year. Further, the improved competitiveness of polyester staple fibre (PSF) vis-a-vis cotton resulted in a five per cent YoY growth in non-cotton yarn production in FY2017, while cotton-yarn production is estimated to have declined by two per cent.
"The domestic spinning industry remains highly dependent upon exports, with a third of India's cotton yarn having been exported during the past five years. Further, high dependence on exports to China and the resulting sensitivity of India's exports to China's policy on reserve cotton stock warrant a cautious outlook on India's yarn exports, until Chinese cotton stock levels subside to historical average," said Jayanta Roy, Senior Vice-President, and Group Head, Icra.
Icra said that as overall yarn demand is expected to remain tepid, spinners may have to sacrifice capacity utilisation or contribution, and hence profitability is likely to remain under pressure. In addition to demand pressures, the spinners continue to face challenges on account of the high cotton prices.
