Firm cotton yarn prices are likely to help textile mills spin better fortunes in the quarters ahead. At around Rs.200 per kg, the price of cotton yarn has gained almost 24% since January 2010.
The outlook may get even better if the forecast of cotton surplus both in Indian and global markets becomes a reality. This will help lift the profitability of spinning mills, which in the last two quarters have seen a ray of hope in lower and stable cotton prices.
In fact, the story is a tad more interesting than just lower raw cotton prices and input costs saving the day for spinners. This time, it’s the China factor.
Global demand for yarn saw a sudden spurt in 2012 as China, which has historically imported raw cotton, turned out to be a buyer of yarn instead. Industry experts feel this trend will continue because of a change in China’s market dynamics. Cotton prices in China are higher than those in the international markets as the government regulates them to promote more planting of the fibre. Besides, wage costs are rising and Chinese textile companies now reportedly prefer to get into value-added production and exports.
Other nations such as Bangladesh, and even domestic garment and other finished textile companies are ramping up yarn inventory as the forthcoming summer is expected to see higher demand for cotton garments. Strong demand pull, which is holding up yarn prices, is also supported by weak supply. Southern spinning mills have been crippled by power cuts and increase in power costs.
But stable cotton prices going forward will buoy profitability. According to the Cotton Association of India, cotton production this year (season) is expected to be 35 million bales (one bale=170kg), while cotton consumption is likely to be about 26.5 million bales, leaving a sizeable surplus. Evidently, unless there is demand for cotton in overseas markets, which seems unlikely at the moment, cotton prices are likely to remain stable.
One could hope for higher revenue on the back of strong yarn prices and better profits, too, if cotton prices favour mills. In fact, even market leaders such as Vardhman Textiles Ltd, KPR Mill Ltd, Ambika Cotton Mills Ltd and Precot Meridian Ltd felt the pressure of rising costs and poor exports of yarn, resulting in contraction of operating profit in the last several quarters. Also, a fall in interest rates could help as most of the spinning mills are bogged down with inventory and high working capital.
In short, if the trend of high cotton yarn prices sustains for a few quarters, spinning mills could see a reversal in fortunes.