Fluffy Indian cotton balls prove tougher than Tata Steel | Mint
Active Stocks
Fri Feb 23 2024 15:58:13
  1. Tata Steel share price
  2. 145.50 -0.24%
  1. State Bank Of India share price
  2. 759.40 -0.86%
  1. HDFC Bank share price
  2. 1,420.90 0.08%
  1. NTPC share price
  2. 337.70 -0.54%
  1. ITC share price
  2. 411.60 -0.65%
Business News/ Opinion / Fluffy Indian cotton balls prove tougher than Tata Steel

Fluffy Indian cotton balls prove tougher than Tata Steel

While Indian steel continues to get whacked for being uncompetitive amid a China-led glut, the nation's textile sector, which also competes with China, is spinning investors a tidy fortune

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

Singapore: What better time than the eve of Lunar New Year to remind the bloated Chinese steel industry that ensuring its survival has become a hong bao, a red envelope into which the rivals are being forced to put all their profit? After declaring a 2,130 crore loss in the December quarter, Tata Steel’s boss for India and Southeast Asia complained about “predatory imports", the European operations chief blamed the Chinese for “unfair" trade practices, and the group’s finance head despaired about the “depreciation of various emerging market currencies",which he said was hurting pricing.

China’s cotton stockpile: 64.5 million bales

The laments are all justified, but they’re of little solace to shareholders in India’s largest steel producer. Tata Steel’s stock has fallen more than 40% over the past year and with analysts now starting to predict a loss even in the fiscal year ending March next year, the outlook is less than comforting.

Remarkably, though, while Indian steel continues to get whacked for being uncompetitive amid a China-led glut, the nation’s textile industry, which also competes with the People’s Republic, is spinning investors a tidy fortune.

This isn’t how analysts were expecting the story to play out. After all, bath towels and bed linen are basically cotton—a commodity. And its price has slumped 36% since early May 2014, a clear source of pressure on revenue because in a competitive marketplace, cost savings have to be passed on to consumers.

Add to that the yuan’s 5.5% decline over the past six months, and there have been ample reasons for investors to worry about how producers will tackle their Chinese rivals. China, India and Pakistan control 85% the world’s home-textile market.

Such was the apprehension that the management of Welspun India, the country’s largest textile exporter by market value, participated in a conference call just three days after China’s shock 11 August devaluation to deliver a simple message: so long as the yuan didn’t weaken more than 10% against the Indian rupee, there would be no shift in market shares.

Seems like it wasn’t an empty boast. On Tuesday, Welspun reported a 21% increase in profit for the December quarter from a year earlier while sales grew more than 12%.

So how are relatively unknown Indian textile companies more successful in dealing with Chinese competition than Tata Steel? The simple answer is: China’s rebalancing. To reorient its economy toward more domestic consumption, China has, among other things, increased factory workers’ wages. But that policy thrust, coupled with a diminishing supply of rural labour, has pushed up costs for cotton farmers. So between 2011 and 2013, Chinese authorities embarked on an expensive price support programme by buying cotton farmers’ produce at above-market rates and stockpiling it. The net result, as a Welspun executive explained, is a 7-10% competitive advantage in India’s favour. That’s because India’s labour is cheaper than China’s, and the stockpiled Chinese fiber is ageing. It’s both more expensive than Indian cotton and also of inferior quality, and no one likes towels that lint.

That same policy imperative of boosting consumption on the mainland, however, is bad news for Indian-made steel. Since households won’t spend if their apartment values are falling, China is compelled to rein in its massive oversupply of homes. But without construction demand reviving meaningfully, or authorities in Beijing actually following through on their promise to shut down superfluous mills, oversupply of Chinese metal will continue to rock global metal companies’ fortunes.

At least for now, India’s humble cotton ball has got one up on Tata Steel. Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
More Less
Published: 05 Feb 2016, 01:21 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App