The decision of the Chinese Government to spend 10% more on farm subsidies instead of fixing higher price of crops is likely to spur yarn production in China and cotton will be available to Chinese Spinning Mills at a cheaper price now. This may have an adverse impact on Indian spinning mills catering to the Chinese market.

A consistent growth in the export of cotton yarn from India to China has been registered in the last three years, as mills in China were so far getting cotton at a higher price and imports from India were viable for them.

The revised policy of China may come as an Achille's heel for textile companies, especially spinning mills in India, as China is the largest importer of cotton yarn in the international market. The share of cotton yarn export to China in the recent past has been estimated at 50% of the total exports from India.

Chairman of Oswal Group, S P Oswal expects approximately 20% fall in the yarn export from India to China this year. "The demand of cotton yarn from China may come at razor thin margins which many Indian companies may find unviable. Those who cannot afford to export at such ridiculous price may not sustain. Our mills have sufficient capacities but are under-utilized due to power shortages."

Indian spinning mills, according to Oswal may be in jeopardy in the wake of lukewarm demand from China as volumes will come down. In anticipation of the high demand trend from China, Indian millers ramped up capacities in the last three years (indicated in table) and a dwindling demand would hit their bottom lines, he added.

Cotton yarn exports are projected to be close to 1,000 million kilograms in 2014-15 and lower in 2015-16 if the demand from China does not revive.

Hardyal singh Cheema, the Managing Director of Cheema Spintex, a company with a vast exposure in yarn exports is keeping his fingures crossed. A record breaking cotton crop of 40 million bales (I bale equals 170 kilograms) as compared to 37 million bales in 2013-14 can be a bliss for the spinning sector. If the demand from overseas buyers shrinks, the milss will be in red.

Cheema is scouting for alternative destinations like Vietnam, Cambodia and Latin America but understands that their volumes cannot match Chinese market size.

The Confederation of Indian Textiles Industries, (CITI) is also keeping a close watch on the development and suggests textile players to look inwards. The Secretary General of CITI, D K Nair told Business Standard that it may be an uphill task for Indian textile companies as the cotton crop this year may be good but the opportunities will be less.

China factor will restrict the exports but there is a silver lining. The Government of India in the revised TUF (Technology Upgradation Scheme) Scheme for the 12th five year plan has stressed the revival of fabric sector. As the garment exports are picking up, a right strategy and due attention to the fabric manufacturing can help to consolidate the entire value chain.

"We export about one third of our cotton and same proportion of cotton yarn. It can be used in domestic industry to raise our share of garment exports in global market," he added.

The domestic demand for cotton has been increasing at 5%-7% annually. The millers, in the short-run are likely to face supplies over stripping demand resulting into lower recoveries but will find solutions as the emerging markets may create new opportunities, said an analyst.

Source:- business-standard.com