By Mr. Balkrishan Sharma
Joint President & Business Head- Spinning, Ginni Filaments
Current Trends in the Yarn Market
The yarn market is currently experiencing a subtle yet discernible current of activity, particularly in select products such as Hosiery and in specific regions like Ludhiana, Kolkata, and NCR. This activity appears to be driven by a surge in export sales in the first half of July 2023, albeit at lower prices, indicating a complex interplay of market forces. Empty pipelines, especially in the domestic market, an increase in S-6 spot prices from 56000/candy levels to 57000/candy & the closure of 1800 spinning mills out of 2200 in Tamil Nadu could be other reasons.
But before this Indian yarn market, encompassing both exports and the domestic segment, has more or less grappled with significant challenges that have had a detrimental impact on spinning & denim units. These challenges are predominantly centred around declining capacity utilization, a factor primarily driven by distress in demand. Rising interest rates, changing consumer preferences, and inaccurate crop forecasting further compound these challenges. Each of these factors contributes to a market environment that is as complex as it is challenging.
Impact of Global Events on the Yarn Market
Despite a ten-day bullish streak in yarns, the fabric market paints a rather sombre picture. The consumer demand at the retail level, particularly in Europe and the US, is marked by weak strokes, slowing down the momentum of purchases. Inflated consumer prices have emerged as a significant antagonist, casting a long shadow over the demand for yarn.
The strategies of the world’s major central banks in setting monetary policy amidst the easing signs of the worst inflation crisis in a decade will be a pivotal chapter in this narrative. Adding to the complexity of the plot is the ongoing Russia-Ukraine conflict. This geopolitical drama continues to churn the markets, creating uncertainty that discourages buyers from engaging in new deals and fabric purchases.
The numbers tell a compelling part of this story. Textile and apparel exports from India contracted by 11.3% in June and 12.2% in May compared to the same period in the previous year. In June 2023, spun yarn exports fell from 115.5 Mn Kgs in May to 81.4 Mn Kgs, marking a decrease of 29.5%. Similarly, cotton yarn exports also dipped in June, from 89.2 Mn Kgs in May to 67.6 Mn Kgs, a reduction of 24.2%.
Dealers’ Chess Game: The Wait-and-See Approach and Manufacturers’ Challenges
Dealers are currently choosing to step back, adopting a ‘wait and watch’ stance. They patiently waiting for the fog of uncertainty to lift before making their next move. This cautious approach underscores their desire for more clarity in the market’s ever-shifting landscape. Meanwhile, manufacturers catering to local markets are finding themselves in a challenging position. A lack of order placements from brands is resulting in a heavy burden of finished inventories. The consequence? A blockage of funds and delayed preparations for the winter season, pushing them further into uncharted waters.
Denim Capacity Utilization Dilemma
Denim capacity utilization has plummeted to less than 45%, indicating the severity of the challenges faced by denim plants and export-oriented manufacturers. Denim plants with in-house spinning facilities are now looking to sell their yarn in the market. Export-oriented manufacturers are also experiencing difficulties, with some even shutting down operations on weekends. Currently, their capacities are functioning at less than 50%.
Cotton Prices and Its Impact
The price of S-6 cotton paints a stark picture of the current scenario in the Indian yarn market. Over a span of just 73 days, from May 1st to July 13th in FY23, cotton prices plummeted from 61,750 rupees/candy to 56,000 rupees/candy, indicating a staggering decline of 5,750 rupees/candy. This sharp decrease becomes even more alarming when compared to the peak levels of the cotton season, where prices reached a high of 71,800 rupees/candy. This translates to a significant decrease of 15,800 rupees/candy from the season’s peak. The continuous downward trend in cotton prices forced buyers in the value chain to adopt a cautious approach till 14th July, 23, delaying their buying decisions However, it is only after 14th July 23 that the prices started increasing and reached up to 57000/candy, thereby helping in yarn momentum to an extent.
Repercussions for Spinning Mills
The distress in demand, has had severe repercussions for spinning mills in India. Yarn prices eased faster than cotton prices due to sluggish demand from both the export and domestic sectors. As a result, spinning mills find themselves incurring cash losses. Many spinning mills who were overly aggressive, chasing growth at all costs, expanding too quickly or just don’t have a point of differentiation have suffered, quickly pivoting into cost cutting mode and are now playing from behind.
Furthermore, the high inventory of expensive cotton further adds to their challenges. This dire situation has led to spinning mills in Coimbatore declaring a halt in production and the sale of yarn starting from July 15th, indicating the severity of the issue. Although some of the spinning mills have agreed to restart production this week, but will their demands be met is a question.
The Value Chain and Crop Forecasting
Ironically, the entire value chain, from farmers to ginners and spinners, has suffered this season. Besides demand, misleading figures regarding crop size also played a villain. The estimation of a crop size of 298.5 lac bales by the Cotton Association of India in May led value chain to anticipate a cotton shortage. However, the actual figures indicate that the crop size might soar to 330-340 lac bales. In fact, the CAI meeting on July 10th, 2023, reported an increase in the projected cotton crop for the season 2022-2023 by 12.83 lac bales to 311.18 lac bales, while projecting a reduction of exports by 4 lac bales to 16 lac bales. Fast forward to July 21st, 2023, and 298 lac bales have already made their arrival, with 256 lac bales already consumed. The export tally stands at 13 lac bales, and imports are close behind at 12.5 lac bales. The expectation is that the carry forward shall be close to 30-35 lac bales.
Need for Accurate Forecasting
The lack of accurate crop forecasting and consumption figures hinders progress and highlights the need for adopting reliable methods for forecasting crops and understanding consumption patterns. Accurate forecasting methods and reliable data are essential for informed decision-making and effective planning.
Challenges and Future Outlook
The textile industry is grappling with a trio of formidable challenges. The distress in demand, inaccurate crop forecasting, and shifting consumer preferences for clothing – a necessity only surpassed by food, energy, and the need to service increasing interest rates – have collectively thrown a spanner in the industry’s growth and profitability. Regrettably, the horizon offers little promise of a clear sky. The trend seems set on its course, and the capital environment, strained and taut, is expected to extend its influence well into 2024. While whispers of a big new wave echo in the media, the reality paints a different picture. The bustling activity in the retail sector has hit the pause button, taking a breather. The pressure on consumer purchasing power, now more intentional and discerning, is another significant factor. However, this pressure is expected to ease off only when inflation starts to relent. While the depletion in demand is a challenge that offers little room for manoeuvre, there are other areas where proactive steps can make a difference. It is crucial for all stakeholders to adopt accurate forecasting methods, rely on reliable data, and foster informed decision-making. These are the compass, map, and rudder that can help navigate the stormy seas of these challenges, steering the industry towards calmer waters.
