MUMBAI (Commoditiescontrol) - The continued depreciation of the Indonesian rupiah against the U.S. dollar, depressed consumer purchasing power, and global economic slowdown is lowering demand for Indonesian textiles and textile products.
Indonesian cotton consumption is thus expected to fall in MY2015/16 to 2.64 million bales, compared to the previous estimate of 3.15 million bales.
Cotton Marketing Year (MY) begins (from August-July)
Indonesia Cotton Production
Indonesia produces 0.3 percent of its total domestic cotton demand, with official reports indicating that production has decreased at an average of 24.79 percent annually since 2008. Cotton production declines are due to high production costs and agronomic risks such as excessive rainfall or extreme drought (as characterized by the El Nino weather pattern occurring in 2015/16). Farmers also earn lower profit margins from cotton compared to other secondary crops such as corn or mung bean.
Indonesia cotton production forecast to decline to 9,000 bales (480lb each) in MY 2015-16 compared to 14,000 bales in MY 2014-15. Assuming that the same problems will continue to hinder cotton cultivation, Indonesian cotton production is forecast to remain stagnant in MY 2016/17 as well.
Cotton Consumption
The Indonesian spinning sector produces spun yarn and sewing thread. The sector is expanding, having grown from 251 companies in Calendar Year (CY) 2012 to 285 companies in CY 2015. In CY 2013, Indonesian spinning mills ran at 86.2 percent capacity, with a total of 10.967 million spindles and 179,385 rotors, compared to 10.21 million spindles and 175,513 rotors in CY 2012. In 2013, industry sources reported that the Indonesian spinning industry consumed a total of 2.6 MMT of fiber as raw material annually, consisting of cotton (26 percent), man-made fiber (73 percent), and others (1.1 %).
Indonesia exports approximately 30 percent of its yarn production. In MY 2014/15 Indonesia increased imports of cotton by approximately 12 percent over MY 2013/14. Despite robust consumption-driven import demand, post expects consumption declines in 2015/16 and 2016/17 due to the following reasons:
# Global economic conditions lowered the price of crude oil, drawing down polyester and synthetic fiber prices. Industry reports that the current price of polyester stands at approximately $0.85/kg with only two percent waste, while the price of middling grade cotton stands at approximately $1.7/kg with 10 percent waste on carded cotton yarn production and 23 percent waste on combed cotton yarn production. Indonesian spinners rely heavily on imported cotton. Unlike manmade fiber spinners, (who generally hold one week’s stocks on hand), cotton spinners must hold a minimum of 2 month’s stocks plus one month “on-the-way” shipment stocks. Cotton therefore requires more capital compared to using manmade fibers.
# Indonesia’s currency remains weak, with exchange rates reaching Rp. 13,367/$1 as of March 3, 2016 compared to Rp. 13,022/$1 on March 5, 2015. The weak rupiah led to depressed consumer purchasing power, while the global economic slowdown reduced export demand for Indonesian textile products. As a result, Indonesian mills have faced an over-supply scenario since the middle of 2015.
# Indonesian textile and textile products are facing fierce competition from illegal imports of yarn, fabrics, garment, and other textile products which are sold in domestic market at cheaper prices. - Faced with these difficult conditions, some textile manufacturers are struggling while others have closed down.
Stocks
Despite declining cotton prices, rising storage costs prevent Indonesian spinners from maintaining large inventories. As a result, spinners prefer to source raw materials on an as-needed basis. Therefore, Post estimates MY 2015/16 Indonesian ending stocks will slightly decline from 552,000 bales in MY 2014/15 to 414,000 bales, tracking with expected lower imports and consumption. MY2016/17 ending stock is expected to marginally rebound to 428,000 MT in line with the expected slight increase in cotton imports.
Policy
Indonesian cotton spinners are heavily reliant on imports. Raw materials make up approximately 60 percent of cotton yarn’s production cost. In order to improve the efficiency and effectiveness of cotton imports into Indonesia, the Indonesian Custom and Excise Office held socialization on the establishment of the Indonesian Logistics Bonded Center (PLB, Pusat Logistik Berikat) in September 2015.
The Indonesian Logistics Bonded Center will serve as a temporary a storage center for goods before they are re-exported or sent to areas outside of the logistics bonded center. The advantage of the logistic bonded center for cotton imports is that imported cotton which is currently transshipped and temporarily stored in Kuala Lumpur or Singapore will be able to be imported directly to Indonesia.
The cotton will remain property of the supplier, allowing spinners to buy as needed directly from the logistic bonded center. Cotton imported and temporarily stored at the logistic bonded center will be exempted from any import related taxes, including value added tax, sales tax on luxury goods, excise tax, and income tax. The imported cotton will also enjoy suspensions of import duties.
Following the socialization, the Indonesian Ministry of Finance issued a regulation on the logistic bonded center. The regulation is effective as of December 31, 2015, and the first center opened in March 2016. The Indonesian textile industry including spinners is supportive of this new regulation as it will simplify the procedures and reduce costs to import cotton.
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(By Commoditiescontrol Bureau; +91-22-40015533)
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