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Cotton and yarn update: Mills need to remain consistent and not rush without proper workout

Recently, Saudi Arabia has shown interest to invest USD 50 billion in power and textile sector. If the investment goes in textile-based on the by-products of petroleum then it would open local sources for synthetics and help textile value chain to cater to non-cotton products that consist more than two-third of total world demand for fiber.

Figure 1: Due to the effect of Coronavirus, the supply chain has been massively distorted and this would impact exports dependent on the Chinese materials.

The demand for yarn is increasing due to some additional Corona orders? The yarn price has been increased. USc 5-10/kg and 100% cotton Ne 30/s card knit yarn now is selling at USD 2.80-3.00 per kg. So, 100% of cotton spinning mills are now operating with a reasonable margin which is good news. But becoming too greedy to exploit the situation like earlier would bring misfortune and history confirms that decision based on the common interest of the value chain is the best for long term sustainability of clothing value chain. Yarn dyeing is also making good money. But specialty yarn margin has shrieked a bit due to the crowding effect as many cotton mills became a specialty yarn manufacturer due to margin crisis during the last year.

What is important for a mill is to remain consistent and not rush without proper workout. Also need to work as a whole considering the long-term sustainability of clothing value chain and opt for newer design, products, export avenues and opportunities other than conventional clothing value chain. Knit and denim garments export is doing better than woven garments export due to support from strong backward linkage industries.

Coronavirus and its impact on global economy

The world economy could not reap the benefit of positive momentum after the signing of Phase-1 deal between the USA and China, before the Coronavirus forced the Chinese economy stand still during their spring festival that were extended till 10th February 2020, as people started resuming offices gradually. The Chinese government is taking cautious measures to reconcile the economic activities back to full pace. We would see how fast they can do that and many believe that short term recovery would require two-three months more. The impact of Coronavirus is expected to reduce Chinese GDP growth by 1-2%.

Due to the effect of Coronavirus, the supply chain has been massively distorted and this would impact exports dependent on the Chinese materials and also create some sort of forced structural adjustments. Like: many retailers are transferring some orders to Turkey from China to bridge the gap. Woven garments export from Bangladesh is likely to be impacted to a greater degree as most of the fabric is imported from China.

Figure 2: What is important for a mill is to remain consistent and not rush without proper workout.

ICE index

Coronavirus has impacted ICE 7-8 cents and seems to be consolidating around 67. But the volatility remains which may cause index to go further down to 60 if China does not implement agricultural purchase (USA Cotton) for 2019/2020 crop year or as we move to the weather market by 3/4 months and if China recovers well and fulfills phase-1 import commitment on agricultural product, it might also turn the market up to 80.

Fixation strategy

ICE would remain volatile with the changes of plantation intentions of different countries, world demand for cotton and the changes of weather in the coming months. But the key to the trend of ICE lies with the import demand of cotton from China and the recovery of the Chinese economy.

So, mills may fix the immediate shipments at the current level. For the future shipments of 2019/2020 crop mills may fix at the current level with some distant puts.  For the 2020/2021 crop, look to fix the price at the current level of some percentage of total quantity if available at a suitable level.

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

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