New Delhi: Textile exporters, already hurt by a rising rupee that makes their prices unattractive, are reeling under a surprise spike in cotton prices, forcing them to produce more value-added goods to offset the hike.
Cotton prices have risen some 15% in a year, and at about Rs24,500 per candy of cotton that weighs 360kg, some textile makers say it’s the steepest they have ever paid.
The worst hit are the integrated textile exporters, who make garments by converting raw cotton to yarn and fabric, because they are unable to pass on the price increase to international buyers due to competitive pricing pressures.
In the past few months, commodity prices have skyrocketed everywhere in the world, and is not restricted to cotton alone. Everything from foodgrain to gold is trading at record levels, either because demand exceeds supply or because, as in the case of gold, it has become a safe-haven asset to hold amid roiling equity and debt markets.
Typically, yarn constitutes between 30% and 40% of the cost for a piece of garment, making it the expensive part of production, according to data supplied by industry body Tirupur Exporters’ Association.
Thus, a 20% increase in yarn price would lead to around 10% hike in the production cost of garment exporters.
With spinning units not able to increase their yarn prices, K. Selvaraju, secretary general of The Southern India Mills’ Association, blamed the purcahse of cotton by foreign investors as the primary reason for the spike in prices.
The association is demanding a ban on exports or reduction of import duty on cotton, which is at 10% .
Selvaraju said yarn prices have dropped when the cotton prices have gone up in the last few months. But Tirupur-based buyers said price of yarn had gone up by 5% since the last cotton season arrival, which starts from early November and ends in February.
R. Sivaram, executive director of Royal Classic Group Pvt Ltd (RCM), which gets 75% of its yarn from its own spinning units and whose company owns domestic brands like Classic Polo, agreed that international buying had contributed to the increase in cotton price. International buyers grabbed local cotton, which was selling cheaper last year.
“This season, when the cotton arrivals started in November, the price difference between domestic and international markets was covered in less than three weeks,” he said.
For another Tirupur-based integrated firm, KPR Mill Ltd, the increase in cotton prices has resulted in lower procurement. It usually would have bought 100% of their requirements by March, but with higher prices kicking in, the company opted to buy only 70% of its usual quantities, said managing director P. Nataraj.
KPR Mill is managing the increase in cost by focusing on value-added products that involve additional embroidery or design work. This allows them to get a higher unit-price per garment exported, said Nataraj.
Royal Classic is now focusing on exports to Europe and billing in euros, as the currency has shown less volatility than the dollar.
According to the Cotton Advisory Board, a government body, cotton production is expected to increase to 31 million bales of 170kg each for the year ended 31 March, against 28 million bales the previous year. This includes exports estimated at 6.5 million bales in fiscal 2008, against 5.8 million bales in the previous fiscal.