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Two Danger Signs For The Yarn Industry Which Will Impact Our Exports Big Time

There’s something dangerous happening in the yarn industry. There are two points of immediate worry for the industry, specifically in Yarn.

Yarn Prices Crash 30%

Firstly, Yarn prices have declined 30% from last year, and the damage has hit exporters. The slowdown in China, our largest export market (33% of our yarn exports are to China), has impacted sales and shipments.

“About 40-50 per cent of the textile production is exported and China is one of the big markets. But China is striving to push exports by making the pricing of its products attractive in the global markets. With more stocks in hand here, the prices will fall drastically in the absence of corrective measures,” said M Anantha Reddy, general secretary of the Telangana Spinning and Textile Mills Association. “A few players are looking for restructuring of their debt,” he said. Stocks of finished goods at mills have increased as buyers refused to lift the stock because of decline in prices, he added.

The price of yarn is down by Rs 10 on a month-on-month basis and by Rs 30 a kg compared with the corresponding period last year, Reddy said. The price of fine yarn (above 30 counts) is now Rs 156 against Rs 176 last year. The two-count yarn is now around Rs 136. The price reduction has eroded the margins for the industry and affected their turnovers.

With the decline in international demand, China, which would take our Yarn, and make fabric and Garments out of it, is choosing to shun Indian imports. In

The textile industry is very large, with more than 10 crore people employed in it. If this big an employer industry, sees its biggest market hit, there’s bound to be an impact, sooner or later.

The Trans-Pacific-Partnership

The US, Canada, Japan and 9 other countries are getting their free trade act together. And they don’t include India. In return for protection on drugs with longer patent times, copyright protection and other concessions like access to markets, the US will not charge any duty to many goods made in these countries and exported. The “free trade zone” effectively means Indian exporters will be charged duties on certain things (like textiles) while manufacturers in these countries will not.

And yarn is a big problem.

From LiveMint:

D.K. Nair, secretary general of the Confederation of Indian Textile Industry, said the TPP will adversely impact the textiles industry because of the yarn forward provision. The yarn forward rule requires clothing to be made from yarn and fabric manufactured in one of the free trade partners to qualify for duty-free treatment under the trade pact. “At present, we export yarn and fabric to Vietnam which then makes the textiles and exports to countries like the US. Now, because of the yarn forward rule, they will be under pressure to develop local production,” he added.

Effectively, Indian yarn producers, who would export to Vietnam (which is one of the TPP countries) will face a problem: If the Vietnam’s garment makers buy Indian yarn, their exports to the US/Canada are not tax free. But if they buy locally made yarn (or yarn from other TPP countries), taxes are not applied. The answer is simple: Indian yarn exporters to Vietnam are going to lose.

The TPP has been agreed upon, but now each member country will need to okay it, and the US Congress needs to ratify it as well. The US and Canada are worried about the hit to their auto industries. Other countries have worries about how much drug prices in their countries will rise. The overall benefits, though, outweigh the negatives and in a few months, this deal could become reality.

The Issue For Stocks And The Economy

There’s a large number of stocks that deal with Textiles and Yarn. From Ambika Cotton (who’s a niche exporter of fine yarn) to KPR Mills to Vardhman Textiles to Arvind Limited, India has a large presence in the space. We exported around $30 billion of them all (FY 2015) and it’s a very large employer.

These stocks had benefited big time on the back of low cotton prices, after China banned raw cotton imports last year (to protect local cotton growers). Now, they’ve slowed down their yarn imports. The frontline stocks will be impacted in different ways, but it’s obvious they haven’t been hurt enough yet.

The economy has a bigger problem: employment. If an industry that employs 10 crore people will suffer, it will take away jobs. This will obviously cause the government to bail out companies, and to provide more employment.

Already the government has been attempting to buy as much cotton as possible to keep prices high (cotton prices are Rs. 4,100 per 37 kg, as procured by the government, which already holds too much, but will have to procure more). Soon, will they have to buy yarn to keep the mills running?  The impact to the fiscal situation will be big if they do, and it will be bigger as a political issue if they don’t.

The lower costs and then, the lower prices, should have helped reduced garment and yarn prices in India too. But India is not very good at handling things when prices fall, because it’s disruptive – after all you don’t ask employees to take salary cuts, you would much rather fire them and hire a cheaper alternative. The disruptive nature of this change is not acceptable, which is why we put steel duties when world prices have fallen, we try to rescue even the richer of farmers by buying rice and wheat even though we let it rot, just because we don’t want prices to fall. Our reaction to the dropping of yarn prices will also be to rescue first and bring prices back up.

The macro picture here is just beginning to form. We’ll have to see company results in this quarter to see if something is amiss, and we’ll see how the TPP evolves. But the best of the Yarn industry in terms of results may be behind us.

  • AJ says:

    Sintex is putting a huge capex for manufacturing textile yarn which may go on stream by next year. They would get hit hard too as below links mention that they were looking to export ~60% to China..

  • kamlesh Agarwal says:

    Deepak, fantastic write up, once again a cautionary note for those dabbling in textile stocks because of the short term euphoria created by the market participants . Even the blue eyed 100% baby merchandise exporter from kerala shall be badly affected.. Regards

  • Biplob says:

    Basically, we’re never going to have stable prices as long as we have a functional democracy.

  • Sun says:

    Stocks like kprmill and Arvind are best, with debt reduction and their exports have increased infact, SME companies are only suffering

  • Ramki says:

    Interesting article as usual but a couple of points need more clarification –
    1. Regarding the statement that about 10 crore people are employed in garment industry. Is this figure worldwide or India. I believe it must be former. In India out of 120 crore population some 45 crore in gainful employment, 67% in agri/allied sectors and outside it biggest employers are construction and government, garment industry will be 3rd in size so we may be talking of 2-3crore people employed in this industry , and the number specifically employed in yarn industry would not be more than 10% of this workforce right?
    2. On TPP agreement, yes it is a threat but is not China which is not affected by TPP equally impacted? BTW none of the TPP nations (like Vietnam, Japan etc) are big cotton producers so will not this blunt the edge and/or give help to our cotton exports?
    3. Lastly falling yarn news no doubt bad for yarn exporters and the related stocks but is it not good news for garment producers and exporters? Yes there could be far fewer listed plays on garment exporters and domestic retailers but the few whatever will gain big time right?

  • Satheesh says:

    Hi Deepak
    I work in textile industry.
    As a reader points out, none of the TPP are big cotton exporters. Spinning cotton is an art, that’s why there are only few spinners in India comparing with garment exporters.
    I really don’t think TPP nations will be able to start spinning yarn all of a sudden. They have to buy yarn from India.
    But I am pretty sure there will be big scale bankruptcies in couple of major textile companies within a year or two. There are several textile companies (especially in North) who expanded their capacity to behemoth levels. One gen x textile company in North India suddenly expanded and they now have 10x spindles than Premier and Thagyarajar Mills (both Premier and Thagyarajar Mills are masters in spinning cotton and they are decades old with strong customer base).
    Spinning and weaving require huge investment. As far as I know, that x gen textile company is on the edge of closing (oh! dont worry, it is just another NPA)
    I am not worried about job loss. Textile is a labor intensive industry. But majority of this labor is required for stitching garments. Spinning, weaving & processing are mostly automated and requires less manpower.
    Reg cotton price crash, I won’t worry about it either. Cotton price was very high earlier, now it is in good price range.
    I am actually bit optimistic about textile industry as domestic industry is becoming more organised. Its a huge market.
    I think TPP will pressure garment exporters to reduce prices further. Pakistan is already getting duty benefits and INR started appreciation. If the yarn prices start increasing, then we are in trouble.
    Anyway I am no expert so I may be wrong.