Textiles Industry Update: Cotton & MMF - Outlook 2020

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July 17, 2019 I Industry Research
Overview

After registering a growth of about 7.2% in cotton season (CS) 2017-18, India’s cotton production is likely to witness a decline of about 15.7% in CS 2018-19 with production at 5.3 billion kgs during the year on back of fall in acreage under cotton due to unfavourable weather conditions and uneven and inadequate rainfall in key cotton growing states. Area under cotton fell by about 1.5% during CS 2018-19 to 12.2 million hectares.

Cotton prices during the year remained largely stable or increased only marginally on back of weak demand in the market. In CS 2018-19, domestic consumption of cotton is expected to marginally improve on a y-o-y basis with a pickup in demand from spinning mills along with improvement in exports demand, majorly from China along with comparatively higher MMF (man-made fibres) prices due to increasing input cost

Going forward, as per International Cotton Advisory committee (ICAC), China’s cotton consumption is expected to be lower by about 14.6% at 8.5 billion kgs during international CS19 vis-a-vis 9.2 billion kgs in CS18. However, on back of falling stockpiles in China despite marginally higher production, cotton imports are expected to witness an increase of over 60% from China for the year (ICAC). This projected increase in imports by China is likely to benefit the Indian exports. Also, in July 2019, MSP for cotton - medium and long staple has been further increased by 2% and 1.8% for FY20 and currently stand at Rs 5,255 per quintal and Rs 5,550 per quintal respectively. Therefore, we expect prices to marginally pick up from the current levels and remain firm on back of strong exports along with tight supply in the domestic market and increased MSP by the government. Going forward, prices are expected to register a growth of about 6-8% and average at about Rs 128 - 130 per kg for CS19.

Cotton yarn production is expected to witness an increase of about 3-5% from current levels and reach 4,300 – 4,400 million kgs in FY20, despite high cotton prices and subdued domestic demand, on back of higher demand from China, Bangladesh and Vietnam. 100% blended & non-cotton yarn production is expected to witness a stable growth of about 2-4% to 1,710 – 1,740 million kgs on back of expectations of moderation in crude oil prices as well as supply constraint for substitute cotton in the domestic market. Also, the domestic downstream apparel industry is expected to witness a growth of about 10-12% (CARE Ratings estimate) during FY20 which will further improve demand for yarn.

Production

Cotton: In CS19, India’s production is projected at 5.3 billion kg, lower by a sharp 15.7% on a y-o-y basis on account of scarcity of water led by uneven and inadequate rainfall in key cotton producing states during the year. Also, some cotton crop was destroyed during the season due to increase in incidents of pest attacks in Maharashtra and Karnataka leading to lower yields. It should also be noted that the acreage under cotton during the current cotton season decreased by about 1.5% to 12.2 million hectares vis-à-vis an increase of about 14.5% during CS18.

MMF: The domestic MMF industry mainly comprises of two components i.e., polyester and viscose, which together accounts for about 94% (in volume terms). Under this, polyester accounts for about 77.5% while viscose accounts for the remaining share. MMF is primarily used to produce 100% non-cotton fabrics and blended fabrics, which are in turn used in readymade garments, home textiles and other industrial textiles. MMF production witnessed an increase of about 3.7% yo-y in FY19 after declining about 0.7% in FY18.

Cotton Prices

World – World cotton production is projected to be lower than its consumption for the fourth year in row. This has marginally supported the cotton prices in CS19 despite the subdued demand. Production in two key countries; India and USA declined during CS19 on a y-o-y basis is expected to lead to shrinking of stock piles in the world. This supported the rise in price during the period in the world market keeping them largely range bound at 87-88 US cents per pound after increasing by about 5.5% y-o-y during CS18 on account of lower demand from China, world’s largest cotton consumer, despite depleting stock piles. Also, increased demand from China has restricted the availability of the fibre globally putting pressure on the prices.

Domestic - Domestic cotton prices remained range bound during domestic cotton season (October-September) 2017-18 at about Rs 117 per kg on account of subdued demand from the spinners. However, during June – August 2018, domestic prices have witnessed an upward trend by registering a growth of about 7-9% y-o-y. This temporary increase can be attributed to the pink bollworm attack that created concerns about supplies among farmers in Maharashtra and Telangana and traders along with increased imports from China that doubled its import quota and its tariffs on the US crop in June 2018. Also, the government announced increased MSP for cotton for FY19.

Prices witnessed an increase of about 11% y-o-y and averaged at Rs 123.5 per kg in the domestic market between October 2018 and April 2019 lead by increased demand from China, low and uneven rainfall along with loss of crop due to pink bollworm attacks in Maharashtra and Karnataka that kept the supply in the domestic market tight. According to the Cotton Association of India (CAI) China imported around 2 million bales of cotton from India during the first quarter of the cotton season 2018-19.

Going forward, as per International Cotton Advisory committee (ICAC), China’s cotton consumption is expected to be lower by about 14.6% at 8.5 billion kgs vis-a-vis 9.2 billion kgs in CS18 on a y-o-y basis during international CS19. However, on back of falling stockpiles in China despite marginally higher production, cotton imports from India are expected to be higher from China for the year. This expected increase in imports is likely to benefit the Indian exportsAlso, in July 2019, MSP for cotton - medium and long staple has been further increased by 2% and 1.8% for FY20 and currently stand at Rs 5,255 per quintal and Rs 5,550 per quintal respectively. Therefore, we expect prices to marginally pick up from the current levels and remain firm on back of strong exports along with tight supply in the domestic market and increased MSP by the government. Going forward, prices are expected to register a growth of about 6-8% and average at about Rs 128 - 130 per kg for CS19.

Typically new crop prices are always higher despite supply increase in the market for a month or so. Subsequently it increases further or drops depending on the daily arrivals and demand from spinners. When arrivals increase in the market, prices fall subsequently and spinners purchase in bulk (2-3 months inventory) which leads to subdued demand in following months. Purchasing is completed by March or latest by Apr-May.

PSF and PFY prices witnessed a double-digit increase of about 21.9% and 14.7% respectively on a y-o-y basis in FY19 while cotton prices witnessed a growth of about 6.8% (S-6) and 9.2% (J-34) y-o-y during the same period. MMF prices witnessed a higher increase on back of higher crude oil prices in the country. Crude oil prices registered a growth of about 21.5% y-o-y in FY19 vis-à-vis a growth of about 15.7% during the corresponding period previous year. PSF and PFY prices averaged at Rs 124 and Rs 116 per kg respectively as of FY19 period.

The VSF prices are dependent on prices of wood pulp. VSF prices have consistently witnessed a stable CAGR growth of about 6.3% between FY15 and FY19. The high CAGR is also on account of FY18, where prices witnessed a sharp growth of about 11%. The prices of VSF are also driven by the availability and prices of the other fibres and the energy cost. At the end of FY19, the VSF prices averaged at Rs 197 per kg and prices of VFY are at Rs 370 per kg in the domestic market.

Yarn Production

After remaining largely range bound in FY18, cotton yarn production in India registered a growth of about 3% y-o-y in FY19. Cotton yarn production stood at 4,182 million kgs during FY19. Overall demand for cotton yarn remained strong during the H1 FY19 period on account of high demand from China coupled with competitive cotton prices in the international market. However, domestic yarn demand continues to be sluggish with substitution taking place from MMF

PTA is a key raw material component in the polyester value chain and reacts with Mono Ethylene Glycol (MEG) in the process of continuous polymerisation for producing polyester. For production of every 1MT of polyester melt, produced via the process of continuous polymerisation, 0.86MT of PTA is required. The largest application for PTA is in Polyethylene Terephthalate (PET) for the polyester industry to produce industrial & textile fibres, PET bottles and film & moulded product applications. The PTA industry is a highly organised industry, with Reliance Industries (~70%), Mitsubishi (~21%) and IOCL (9%) being the only PTA manufacturers in India.

PTA production in India has largely remained stable at average of about 3,500 thousand tonnes over the last five years. Demand for PTA is driven by the textile and beverages sector. Earlier during FY14-FY15, with increasing consumption of PTA, the demand was met by imports, but with the expansion of capacities by manufacturers in India, the share of imports in the PTA industry declined over the years.

The MEG industry is a highly organized industry, with Reliance Industries, India Glycols and IOCL being the only MEG manufacturers in India. The MEG production in India has remained largely stable at around 900 – 1,100 thousand tonnes during FY15 and FY19. It registered a CAGR growth of about 6% between FY15 and FY19 from 923 thousand tonnes to 1,160 tonnes in FY19. Imports had been consistently increasing till FY17, however, in FY18 and FY19, imports declined by about 13.7% and over 40% y-o-y respectively on back of higher domestic production and subdued demand. Imports registered a decline of about 9% CAGR between FY15 and FY19 while consumption recorded a slower 4.2% CAGR during the period. Exports, however, has witnessed a significant increase of over 40% between FY15 and FY19.

Prices

The main raw materials of polyester are purified terephthalic acid (PTA) and mono ethylene glycol (MEG). Costs of these petrochemical derivatives are largely subject to volatility in crude oil prices. The prices in the last 2 years have increased sharply on back of rising crude oil prices. However, in FY19, with over 21% higher crude oil prices, PTA prices witnessed a sharp increase of over 28% y-o-y on back of lower production while MEG prices registered a decline of over 5% y-o-y on back of about 2.4% higher production amidst 27% decline in consumption on a y-o-y basis.

In terms exports, India exports about 35-40% of the total cotton yarn exports in the country to China (465 million tonnes), followed by about 18% to Bangladesh (225 million tonnes) and about 5% to Pakistan (61 million tonnes) and Egypt (58 million tonnes) each and abut 3-4% to Vietnam (43 million tonnes). India imports only about 5-7 million tonnes of cotton yarn primarily from China, Vietnam, Indonesia and Sri Lanka.

Cotton Yarn Demand & Price

Demand: Cotton yarn demand in India remained sluggish during the FY19 at 2,933 million kgs registering a decline of about 1.4% y-o-y after increasing by about 3.9% during the same period last year. However, export demand witnessed a strong double-digit growth of 14.7% y-o-y and stood at 1,261 million kgs after declining by about 8.8% during FY18. China and Bangladesh together account for about 55% of India’s total cotton yarn exports followed by Pakistan, Egypt and Vietnam that account for 5%, 4.5% and 3.5% respectively as of FY19. The overall domestic textiles industry is on the path of revival with the effects of goods and services tax (GST) implementation in July 2017 now fading. In FY19, on back of higher crude oil prices (21.5% higher y-o-y); demand for MMF witnessed marginal slowdown. Going forward, in FY20, despite high cotton prices and subdued domestic demand, yarn production is expected to witness an increase of about 3-5% from urrent levels and reach 4,300 – 4,400 million kgs. With the industry now stabilising post the demonetisation and the implementation of the goods and service tax (GST) regime, the demand from downstream industry - apparels and madeups, has started to marginally pick up in the last few months and is expected to witness a growth of about 10-12% y-o-y in FY20 on back of rise in disposable income, increased usage of plastic money leading to impulsive buying among the Indian consumers. In terms of exports, with increased demand from major importing country China (demand increased by a sharp 47% y-o-y in FY19 after declining by over 30% during FY18), cotton yarn exports are likely to continue register an uptick going forward. However, Vietnam continues to be in a better position to serve the Chinese yarn demand since last few years as exports from India to China attract a 3.5% duty while Vietnam has duty-free access to Chinese markets. Also, Chinese yarn manufacturers have set up their operations in Vietnam for free flowing trade activities. Despite this, India is expected to continue being the largest exporter of cotton yarn in the world.

As can be seen in the Tables above, cotton yarn prices do not move in tandem with the cotton prices alone, i.e., the coefficient is not significant. Similarly for PSF prices, while PTA shows significant coefficient, MEG does not, therefore it can be concluded that prices alone do not determine the yarn or fibre prices and demand, inventories and supply conditions continue to have a significant impact on the prices.

Going forward, with crude oil prices expected to moderate in FY20 on back of ever increasing US oil production; overall weak world economy on back of on-going trade wars, the substitute manmade fibres (MMF) prices are expected to be competitive in the domestic as well as international markets. Hence, Care Ratings’ expects the demand for cotton yarn to improve only marginally by about 3-5% y-o-y during the upcoming season. In FY19, cotton yarn prices (40’s count) increased only by about 3.8% y-o-y to Rs 270 per kg despite an increase of about 6 – 9% in cotton prices during the same period on account of weak domestic demand. Similarly, during CS19, cotton yarn prices increased only marginally by about 2% to Rs 272 per kg while input material cotton price witnessed an increase by about 4 – 5% during the same period.

Spinners Profitability

Cotton yarn prices (40s) witnessed slower growth of about 3.8% y-o-y in FY19 after increasing by over 7% for the last 2 years. However, prices have started recovering on a month-on-month basis after witnessing stable growth for last few months with a growth in cotton prices. Also, polyester fibre and yarn prices have witnessed higher growth of about 18% in FY19 while polyester blended yarn prices have witnessed only a marginal growth of about 7.4-7.5% y-o-y during the same period. Therefore, operating margins of spinners will continue to remain under pressure in the short to medium term as the increase in cotton and blended yarn prices will be lower than the increase in cotton and MMF prices amidst weak demand in the country. Also, on back of slower movement in yarn demand, the utilization rates of the domestic spinners is expected to be lower which will put further pressure on the margins.

Cotton yarn prices are highly volatile due to volatility in the demand (depending on price of the substitute – synthetic yarn), which is majorly impacted by exports of cotton and cotton yarn. Also, any fluctuation in crude oil impacts the prices of the substitute man-made fibres and yarn. India exports around 15-20% of cotton and 30–40% of cotton yarn. Therefore, even a minute change in the exports demand supply scenario significantly impacts domestic prices and thereby the margins of the yarn spinners.

Major policies announced

  -As of August 2018, the Government of India has increased the basic custom duty to 20% from 10% on 501 textile products, to boost Make in India and indigenous production

  -The Government of India announced a Special Package to boost exports by US$ 31 billion, create one crore job opportunity and attract investments worth Rs 80,000 crore (US$ 11.9 billion) during 2018-2020. As of August 2018 it generated additional investments worth Rs 25,345 crore (US$ 3.8 billion) and exports worth Rs 57.3 billion (US$ 854.4 million)

  -The Government of India has taken several measures including Amended Technology Up- gradation Fund Scheme (A-TUFS), scheme is estimated to create employment for 35 lakh people and enable investments worth Rs 95,000 crore (US$ 14.2 billion) by 2022

  -Integrated Wool Development Programme (IWDP) approved by Government of India to provide support to the wool sector starting from wool rearer to end consumer which aims to enhance the quality and increase the production during FY18 to FY20

  -The Cabinet Committee on Economic Affairs (CCEA), Government of India has approved a new skill development scheme named 'Scheme for Capacity Building in Textile Sector (SCBTS)' with an outlay of Rs 1,300 crore (US$ 202.9 million) from FY18 to FY20

  -The government extended 2% interest subsidy for modernising spinning machines that are over 15 years old

  -10% capital subsidy for all new machines for the weaving and garmenting sector, 5% interest subsidy for common effluent treatment plant, 15% capital subsidy for the individual ETP and Rs 1 crore R&D assistance for ETP

Conclusions:

  • With the industry now stabilizing post the demonetization and the implementation of the goods and service tax (GST) regime, the demand from downstream industry - apparels and made-ups from both domestic and international markets, has only marginally picked up in the last few months. CARE expects the domestic apparel market to grow by 10% - 12% in FY20 driven by the growth in the Indian economy leading to the rise in disposable income, favorable demographics and growing share of working women in the country.
  • Going forward, as per International Cotton Advisory committee (ICAC), China’s cotton consumption is expected to be lower by about 14.6% at 8.5 billion kgs vis-a-vis 9.2 billion kgs in CS18 on a y-o-y basis during international CS19. However, on back of falling stockpiles in China despite marginally higher production, cotton imports are expected to witness an increase from China for the year. This expected increase in imports is likely to benefit Indian exports during the year. Also, in July 2019, MSP for cotton - medium and long staple has been further increased by 2% and 1.8% for FY20 and currently stand at Rs 5,255 per quintal and Rs 5,550 per quintal respectively. Therefore, we expect prices to marginally pick up from the current levels and remain firm on back of strong exports along with tight supply in the domestic market and increased MSP by the government. Going forward, prices are expected to register a growth of about 6-8% and average at about Rs 128 - 130 per kg for CS19
  • Cotton yarn production is expected to witness an increase of about 3-5% from current levels and reach 4,300 – 4,400 million kgs in FY20, despite high cotton prices and subdued domestic demand, on back of higher demand from China, Bangladesh and Vietnam. 100% blended & non-cotton yarn production is expected to witness a stable growth of about 2-4% to 1,710 – 1,740 million kgs on back of expectations of y-o-y lower crude oil prices as well as substitute cotton supply constraint in the domestic market
  • Operating margins of spinners will continue to remain under pressure in the short to medium term as the increase in cotton and blended yarn prices will be lower than the increase in cotton and MMF prices on back of marginally high supply amidst weak demand in the country
  • However, cotton yarn demand will be closely monitored due to China’s cotton policy and diminishing stockpiles as well as high crude oil prices that impact the prices of its substitute – manmade fibres (synthetic yarns).
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