According to officials in the Southern India Mills Association, cotton yarn exports in January (valued at $513 million) plunged as much as 50% from a year earlier. This would impact spinning mills adversely, especially since exports in the first six months were already down by 30-40%.
Even in terms of global trade, one cannot ignore the fact that China is among the largest importers and exporters of cotton and yarn.
Shipments to China have stopped due to the lockdown in the region since the outbreak of the coronavirus. International prices of both yarn and cotton are down by 3-6% since the Covid-19 outbreak.
What this means is that domestic spinning mills will be caught in a web of unsold yarn stock, soft prices, high raw material costs and inventory carrying costs.
Unfortunately in India, the minimum support price offered to farmers by the government stymies a commensurate drop in cotton prices, in spite of weak demand.
“As such, the mills were operating on thin spreads even in the first six months of FY20. While some recovery was expected in the fourth quarter, which is typically the best, lower exports to China will be a dampener for domestic yarn manufacturers," said Anuj Sethi, senior director at Crisil Ratings.
The chart alongside shows how Ebitda margins of yarn mills have been falling on weak revenue traction. Ebitda stands for earnings before interest, tax, depreciation and amortization. Data from Crisil Ratings shows the average Ebitda margin of seven leading listed companies has fallen to 10% in Q3 FY20 from 14.2% a year ago.
In addition, the coronavirus epidemic has impacted the supply of dyes and chemicals to domestic textile mills that rely mainly on China, which in turn may hit yarn processing.
Meanwhile, attempts to supply processed yarn to Vietnam, which normally sources the product from China, may not help to offset the lower exports to China, given its sheer magnitude. To be sure, lessons have been learnt on the need to derisk business. The Cotton Textiles Export Promotion Council’s efforts to seek alternative markets and supply chains for the industry are bound to take time.
While the development has had a mixed impact on share prices of spinning mills, the larger integrated mills may be able to tide over the situation. However, most mid-sized spinners may face margin erosion and even suffer losses.
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