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Better demand is likely to keep domestic cotton prices firm

Sep 01, 2021
Better demand is likely to keep domestic cotton prices firm

Cotton prices have remained volatile for quite some time. The textile industry has raised the issue of rising domestic cotton prices with the government. If raw material prices continue to remain elevated for an elongated period, it can negatively impact margins for yarn manufacturers, says Pulkit Agarwal, Associate Director, CARE Ratings. In this interview, he analyses the fibre and yarn market against background of rising input costs and recent policy announcements (like of the Government of India.

How do you analyse the performance of the yarn market (synthetic as well as natural) in 2020-21 and 2021-22?
Covid 19-induced lockdown had severely impacted the entire textile value chain in Q1FY21. However, with easing of restrictions and strong pent-up demand, the overall yarn sector witnessed strong recovery in the later part of the year, although in FY21, cotton yarn production declined by 18% on y-o-y basis to 3,260 thousand tonnes. This was mainly due to sharp decline of 53%-94% in the first 3 months of FY21 on account of Covid-19 disruptions. During FY21, Man Made Fibre (MMF) yarn output declined by 18.75% on y-o-y basis. The demand for both cotton yarn and MMF yarn has been increasing consistently, though there has been marginal dip in Q1FY22 on account of Covid 2.0 lockdown. Cotton yarn production in Q1FY22 was down by 2.8% on Q-o-Q basis and polyester yarn production was down by 3% during the same period.

What has been the effect of rising raw material cost on the textile industry?
Cotton prices have been volatile over the past few years. Cotton yarn prices have risen very steeply in India as well as in the overseas markets in the recent past driven by robust demand from both export and domestic market post easing of lockdown restrictions. On an average, the cotton yarn prices improved by 17% from Rs 218 per kg in October 2020 to Rs 255 per kg in March 2021. As a result, the difference or spread between cotton spun yarn and ginned cotton also witnessed sequential increase in each of the months during this period as it improved from Rs 103 per kg in October 2020 to Rs 121 per kg in March 2021, a growth of 17.5%, which is believed to have augured well for the cotton yarn spinners.

Similarly, with rising feedstock prices (PTA and MEG), polyester yarn prices have been moving upwards though some moderation was witnessed in April and May 2021 with COVID 2.0. Furthermore, importing cost has also increased with increase in the freight charges amid COVID disruptions. If raw material prices continue to remain elevated for an elongated period, it can negatively impact margins for yarn manufacturers. Furthermore, higher cotton yarn prices would also impact margins of apparel players who already have seen decline in apparel exports in FY21.

Is 10% import duty on cotton hurting the spinning mills (who have been advocating removal of the duty)?
Although India is a major producer and exporter of cotton, some quantity of extra-long staple variety of cotton, which is not available in the country, is imported. The Cotton Textiles Export Promotion Council has appealed to the textile ministry to remove the import duty on cotton. Levy of 10% import duty on cotton import was aimed at benefitting domestic cotton producers. India imports only around 4%-6% of cotton consumption and, hence, the imposition of duty does not significantly impact the textile industry.

What is the contribution of exports to the Indian yarn industry? India’s total Textile and Apparel (T&A) exports stood at $ 30.90 billion in FY21 out of which about 52%, i.e., $ 16.10 billion was cotton-based textile. India’s yarn exports improved merely 1% in FY21 to $ 2.80 billion as compared with $ 2.77 billion in FY20; however, in volume terms, it increased by 5% during the same period. Strong demand for cotton was witnessed from China, Vietnam and Bangladesh. Announcement of ban by the US (one of the largest textile-importing nations in the world) on imports of China’s cotton products made in Xinjiang region at the end of 2020 due to forced labour issues is believed to have supported higher cotton imports by China.

So, is the ban on cotton from Xinjiang (China) benefitting Indian spinners?
China enjoys a 24% share in the US textile fabrics market, 40% share in yarn market and 36% share in clothing. Compared to this, India’s share, respectively, is 9.42%, 13.83% and 4.38%. The US Senate passed legislation to ban the import of products from China's Xinjiang region. This will lead to higher opportunities for India as US and other countries would look for alternative sources, and India being one of the largest cotton textile players having an advantage of being fully-integrated textile value chain is expected to benefit from this ban.

How will the extension of RoSCTL for further three years and recently notified RoDTEP rates benefit spinning mills?
As per the data available from CMIE, India’s apparel exports stood at around Rs 90,000 crore (excluding made-ups) for the period of 12 months ended March 31, 2021 (Rs 110,000 crore during FY20). The rebate rates for apparel under Rebate of State and Central Taxes and Levies (RoSTCL) scheme range between 2.10% and 3.60% depending on the nature of the product and material used. Considering an average rebate rate of around 2.5%, the extension of the RoSCTL scheme is likely to result in protection of the apparel sector’s operating profitability to the extent of around Rs 2,500 crore and thereby improve the competitiveness of the sector in the export market. With expected improvement in competitiveness of apparel and made-up exporters, the demand for spinning mills is also expected to improve.

Furthermore, the Government recently announced rebate rates under Remission of Duties and Taxes on Exported Products (RoDTEP) scheme. Amongst the various sectors, cotton-based textile products have received favourable rates under RoDTEP in the range of 3.8%-4.3% as compared with around 2% rate under Merchandise Exports from India (MEIS) scheme although there is a cap on the maximum benefit available under RoDTEP. Considering the average incremental rebate of around 1.5%-1.8% for these products, it translates into additional export incentive of Rs 750-850 crore per annum for the sector.

How effective will the PLI scheme be for MMF and technical textile segments?
Production Linked Incentive (PLI) scheme has been announced for the textile sector with an outlay of Rs 10,000 crore being provided only for apparels/made ups made from MMF and technical textiles. With the introduction of such a scheme, the foremost intention of the Government is to boost the country's export value by building large-scale production of downstream products, which has higher value.

India has traditionally been a cotton-based textile exporter, whereas globally, the trend has been towards MMF-based products. In order to enhance the export basket, India needs to focus on MMF products. The PLI scheme would enhance India's manufacturing capabilities by increasing investment and production in the textile apparel sector, especially in the MMF segment and technical textiles. While the quantitative benefits of the PLI scheme on MMF production and exports will be huge, the quality of the products would go up as well.

What is your short- and long-term outlook for yarns (synthetics as well as natural)?
As per the United States Department of Agriculture (USDA), global cotton consumption is expected to grow by 3.8% to 26.7 million tonnes amid 5% increase in production to 25.9 million tonnes during cotton season (CS) 2021-22 (beginning August 2021). In addition to this, cotton stocks at the end of cotton season 2021-22 is estimated to fall by 4% to 19.4 million tonnes. Cotton stocks at the end of 2020-21 season are also expected to decline by 5% to 20.3 million tonnes. Apart from this, the cotton stock to use ratio is estimated to contract by 6% y-o-y to 73% during 2021-22. All these demand-supply factors, in turn, are likely to provide support to the international cotton prices in coming months. This is expected to encourage cotton exports from India as well. In addition to this, estimated better cotton demand in India during cotton season 2021-22 is likely to keep the domestic cotton prices firm.

Cotton yarn production that declined in Q1FY22 is expected to improve on account of the easing of various restrictions from June 2021 onwards and the vaccination program, which is likely to result in pick-up in domestic demand, whereas the export demand continues to benefit from the ban on cotton from Xinjiang region.

Easing of various restrictions and vaccination program is expected to support domestic demand for MMF segment as well during FY22. In addition to this to better MMF exports, the government announced PLI scheme for MMF segment, and technical textiles is likely to encourage MMF-based textile and apparel exports from India going forward.