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Cotton is half of total raw material cost in the Indian textile industry

Cotton plays an important role in the Indian economy as the country’s textile industry is predominantly cotton based. India is one of the largest producers as well as exporters of cotton yarn.

Cotton accounts for 51 percent of the total raw material cost in the Indian textile industry and continues to remain at an elevated level. The situation is forcing domestic industry margins, according to India Ratings and Research (Ind-Ra).

cotton in Indian textile industry

India Ratings and Research (Ind-Ra) has published the June 2019 edition of its credit news digest on India’s textile sector, which highlights the trends in the sub-segments of the textile sector, including cotton, man-made fibers, yarns, and fabric with a focus on commodity prices, imports/exports, production, capital expenditure and recent rating actions.

Cotton yarn and fabrics exports account for about 23 percent of India’s total textiles and apparel exports. This decreasing price spread, along with a gradual improvement in demand, provides much-needed respite for cotton industry players. Capital expenditure in textiles has been majorly to replace machines with new technologies.

The benchmark variety of cotton jumped to Rs 12,373 a quintal on Friday from Rs 11,698 a quintal at the beginning of the month.

With fall in the spreads, the agency now expects a continued trend of increased imports in FY 2019-20 and for the current sowing season- October 2018 to September 2019- cotton production projections have been reduced by 0.6 million bales owing to the scarcity of water in few states and lower acreage/yield of the crop. This means 1.5 million bales will need to be imported to meet the domestic consumption, the report said.

According to Rahul Mehta, President, Clothing Manufacturers’ Association of India (CMAI), the textile industry works at a very thin margin of 2-3 percent.

“The raw material price rise of 6-7 percent along with the increase in other cost is creating pressure on profit margins,” he added.

Meanwhile, yarn production has been fluctuating over the last six months, although the production average has been maintained. Exports have risen to more than 30 percent during March 2019. Prices of cotton yarn are co-related to raw cotton prices and thus have seen an upward movement in line with raw cotton prices.

Synthetic fabrics have seen a gradual revival in demand due to the reduced cost of production. Falling crude oil prices have made synthetics more competitive against increasing cotton prices. Partially-oriented yarn and texturized yarn prices declined by eight percent and seven percent month-over-month respectively. Overall apparel production improved by about 34 percent year-on-year and exports improved by 18 percent year-on-year.

Readymade garment exports have decreased as the world economy has slowed down and removal of tax incentives for exports by the government have made Indian textile goods less competitive Vietnam and Bangladesh, which have improved their market share in the global textile industry in select sub-segments. Decreasing exports and weak consumer sentiments have impacted the industry’s capacity utilization.

Some major reasons behind the continuity of remaining elevated level of inflation in raw material cost:

  • Cotton exports are freely allowed, and rightly so, this makes domestic cotton prices follow international prices. Cotton accounts for 65-70 percent of the yarn cost and a 35 percent increase in cotton prices mean a 20 percent increase in yarn prices.
  • Power constitutes the second most important element of cost: this has gone by 30-40 percent due to power cuts and needs to buy power from the open market or generate it using liquid fuels. For mills that pay the full cost of power. It accounts for 15 percent of the yarn cost in normal conditions. In today’s situation, it is high as 20-21 percent.
  • There is going to be an increased shortage of yarn in days to come, as per consumption is increasing day by day in India. The United States Department of Agriculture (USDA) estimates India’s cotton output at 5.9 million tons for 2018-19 as compared to 6.3 million tons for the previous year.

Overall apparel production substantially improved by about 34 percent year-on-year for the latest-available date for April 2019 and exports improved by 18 percent year-on-year, as per the latest available data for May 2019.

Capital expenditure in textiles has been majorly to replace machines with new technologies and shift to premium/niche products in the existing line-up. Projects outstanding for the quarter ending March 2019 were worth ₹680 billion as against completed projects of ₹10-15 billion. New projects announced were balanced by the completed projects for the quarter ending March 2019.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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