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Cotton Special: Sky-High Yarn Rates Throw Textile Sector Off Balance; ICRA Expects Better Days in FY'22

18 Jan 2021 4:06 pm
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New Delhi (Commodities Control) - With the worst of the pandemic impact behind us, the Indian textile sector is now on a recovery path.

However the demand-price equation is suffering from an imbalance at many levels of this sector. Exorbitantly high cotton yarn prices are an area of concern for fabric and garments manufacturers.

The sector laments that yarn prices are yet to adjust itself in the downstream industry. Thus they hope for the prices to stabilise in the coming months due to increased production.

This is the reason why the textile millers and garments unit owners are not too anxious about obtaining stocks at the moment.

Moody's Investors Service Company ICRA has revised the FY2022 outlook for the Indian textile sector to 'stable', the rating agency added that risks, however, remain given the nascence of recovery and the continuing impact of the pandemic.

"Indian as well as the global cotton output is expected to decline in CYG’21 (Global Cotton Year ending July 2021). As the demand is likely to rebound on recovery from the pandemic impact, cotton stocks are expected to decline. However, despite moderation, absolute cotton stocks as well as the cotton stock-to-use ratio are expected to remain high, owing to sizable carryover stocks brought forward from the previous year," ICRA said in its report.

It is to be noted that the Cotton textiles industry is witnessing a recovery in nearly a decade. The sector underwent particularly bad phase 2 years prior, i.e. even before the pandemic struck.

Meanwhile cotton yarn prices are expected to stay firm tracking the bullish trend in global cotton prices. The latest World Agriculture Supply and Demand Estimates Report by the US Department of Agriculture points towards lower global cotton output and improved consumption for the 2020-21 crop year. Cotton output is seen dropping in the U.S as well in India, while cotton exports are seen rising in the latter. ICE cotton prices have travelled all the way from sub-50 cents to 82 cents level in the past week.

This reflected in domestic cotton prices along with woven cotton yarn. The prices of the latter surged from Rs 193.81 in August 2020 to Rs 267/Kg very recently in January 2021. That’s a rise of 37.7% in less than six months, while the yarn prices have gained 10.23% since last month.

Demand for domestic and international yarn and textile products has increased sharply. According to Texprocil, exports of cotton yarn, fabrics, and handlooms has surged over 14% to Rs 7260 crores. However on yearly basis, the exports have dropped for the three quarters of the current financial year by 4.89% to Rs 50,506 crores. It is to be noted that decline in the export number was restricted to months prior September 2020.

ICRA, in its report, observed that yarn output during Corona-led lockdown had dropped by 76%. However with the improvement in domestic and exports demand, post May 2020, yarn production bounced back. Cotton yarn production during September-October 2020 witnessed a rise of 3-4% YoY. Total output may have slipped by 35% during the seven months of the current financial year, however it has picked up pace and indicates continued rise hereon.

According to Sanjay Garg, President of North Indian Textiles Mills Association (NITMA), “the players in the sector jumped into action towards obtaining raw material once the lockdown restrictions ended. During this period, there was robust demand for cotton yarn which no one had anticipated.”

Meanwhile, a SIMA member and Tirunelveli-based mill owner Maninarayan Velayutham wonders, ‘what the future will be like going forward, in the backdrop of sharp spurt in cotton yarn rates.

SIMA Chairman, Ashwin Chandran, however, believes that there’s no need to panic in case of procuring cotton yarn at the moment, as rise in yarn output in next 2-3 months is expected to stabilise the prices.

He adds that units of several cotton textiles have resumed operations along with various spinning mills that were shuttered during lockdown. This will ensure uninterrupted availability of cotton yarn, cooling off heated prices for a while.

Mumbai-based Garment and Yarn company owner P.H Udani expects the supply-demand imbalance to smooth out with improvement in production of cotton yarn in the coming months. This will eventually help put a brake on the northward rally of yarn prices, for a while.

Even the Handloom sector has been at the receiving end of the challenges arising from exorbitantly high cotton yarn prices. Textiles sector based in Maharashtra’s Ichalkaranji have suffered severe pressure on their margins. Manufacturers, here, reveal that cotton yarn and synthetic yarn prices have surged 50-60% in the last 3-4 months. It is to be noted that the current yarn rates are even 20-30% higher than the rates in pre-Covid times. However, its product rates have risen by just 20-30%.

Having said so, mill owners along with retail store owners across the major markets agree that demand casuals and fabrics have improved in rural India. However, they observe that raising the prices of the end-products has been difficult due to cut-throat competition. Input costs continue to be on the higher side due to shortage of labour and mill-workers.

NITMA President also agrees that after the removal/ease in lockdown restrictions, a major shift in demand has been witnessed towards villages and districts. He adds that nearly 70% demand for fabric is directed towards rural India.

ICRA reports that Fabric production is also likely to revert to growth in FY2022, with improved demand from the downstream segments. "Within fabrics, cotton knitted fabrics and blended knitted fabrics are likely to perform better, given the shift being witnessed in consumer usage and preferences, in favour of casual/active/lounge wear,"

Having said so, it adds that the garment sector may continue to suffer from suppressed margins, even as spinning mills’ margins rebound to pre-Covid levels.

Although as mentioned earlier, in FY 2021-22, fabric and domestic apparel industry revenues are seen growing at the rate 30-35% and 35-40% respectively. Revenues in both the categories had declined severely in the current financial year.

Supported by export demand, even as demand from domestic downstream segments may recover at a slower pace, yarn realisations and contribution margins are expected to remain at comfortable levels in FY2022…, ICRA’s report said in its key metrics section.

(Commodities control Bureau)

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