cotton yarn industry outlook - Infomerics Ratings

India is one of the leading producers of raw cotton and cotton yarn in the world. Production of cotton yarn in

India has increased at a Compound Annual Growth Rate (CAGR) of 3.51 per cent from 3079 million kg in

2009-10 to 4059 million kg in 2017-18 while its consumption has increased marginally at a CAGR of less

than 1% only, during the same period. Thus, over the years, substantial exportable surplus of cotton yarn has

been generated in the country.

INDUSTRY OUTLOOK

31 May 2019

COTTON YARN INDUSTRY OUTLOOK

Source: Confederation of Indian Textile Industry (CITI): Textile Times’ Volume XVI, No.6(April 2019) https://www.citiindia.com/wp-content/uploads/2019/05/TT-APRIL-2019.pdf

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Source: Confederation of Indian Textile Industry (CITI): Textile Times’ Volume XVI, No.6(April 2019)https://www.citiindia.com/wp-content/uploads/2019/05/TT-APRIL-2019.pdf and Cotton Corporation of India.

However, in recent years, production faces certain adverse impact due to subdued export demand. Given the

weak demand along with high cotton prices and availability of MMF (manmade fibers) pose certain challenges

for the industry. The Cotton Association of India (CCI) has pegged the 2018-19 crop size at 348 lakh bales, lower

than the 365 lakh bales produced in 2017-18 on account of deficient rains hurting the output in states such as

Gujarat, Maharashtra and Karnataka.

The states of Gujarat, Maharashtra, Telangana, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana,

Rajasthan, and Punjab are the major cotton producers in India. Cotton yarn and fabrics exports accounts for

about 23 per cent of India’s total textiles and apparel exports. 3

Table 1: Area and Yield of Cotton Production in India (2010-11 to 2018-19) Year Area

(Lakh Hectares) Yield (Kgs Per Hectare)

2010-11 111.42 517

2011-12 121.78 512

2012-13 119.78 525

2013-14 119.60 566

2014-15 128.46 511

2015-16 118.77 484

2016-17 105.00 568

2017-18 124.29 506

2018-19 122.38 476

EXPORT SCENARIO

In Gujarat, cotton remains an important crop as the area is a hub for cotton and cotton product exports with large

ginning and spinning industry. The estimate for planted area in Gujarat remains lower in 2018-19, however,

yields are likely to be higher. The cotton acreage in Maharashtra is estimated to be marginally lower than last

year, but yields are estimated to be higher. Though drought did impact the crop in the Maharashtra and Gujarat

cotton belt, but it was not substantial.

Cotton planting in the northern states of Punjab, Haryana, and Rajasthan receive irrigation; more than 95 percent

of area in the states of Punjab and Haryana is irrigated. Cotton acreage in Haryana is expected to remain the

same as last year, but production is estimated to be higher. Planted area in Rajasthan is also estimated to

increase.

The acreage in the southern states of Andhra Pradesh, Karnataka and Tamil Nadu is expected to increase over

last year. However, the yields may vary based on different factors. In Andhra Pradesh, yields are expected to be

lower as the area that was previously planted using illegal herbicide-tolerant (HT) cotton seeds (estimated at 5-10

percent of total area), would now be planted using state government approved seeds which have a lower yield.

China is the world's largest importer of cotton yarn and it is the largest export destination for Indian cotton yarn

also. The other major export destinations for Indian cotton yarn are Bangladesh, Pakistan, Egypt, Portugal, and

Republic of Korea among the others.

Cotton yarn contributes significantly to the exports basket of India with USD 3.80 billion (estimated) export value

in 2018-19. Cotton yarn exports from India increased at a CAGR of more than 22% (quantity terms) during

2009-10 to 2013-14 when cotton yarn exports were given export incentives such as 2% incremental export incen-

tive, 2% interest subvention and 3% focus market incentive. However, cotton yarn exports to world (quantity terms)

declined substantially at a CAGR of 4.4% during 2013-14 to 2017-18 as export incentives on cotton yarn were

withdrawn after 2013-14.

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Source: ITC Trade Map and Confederation of Indian Textile Industry (CITI)

It may be noted that China is a major importer of cotton yarn from India; whereas a deterioration of US-China

relations or the so-called trade war might benefit India as China has to import cotton yarn from other countries

including India. However, Vietnam remains a major competitor for India. The following Table shows that Viet-

nam’s export share has increased in China compared to India over the years.

Source: ITC Trade Map and Confederation of Indian Textile Industry (CITI)

Source: Confederation of Indian Textile Industry

In value terms, India's exports of cotton yarn declined by 25% from USD 4,570 mn. in 2013-14 to USD 3,443

mn. in 2017-18. This is mainly because of the duty disadvantage faced by the Indian exporters in major mar-

kets. For instance, China which is the largest importer of cotton yarn has shifted from India to Vietnam or Indo-

nesia as they have duty free access while Indian yarn carries 3.5% import duty. Indian exports of cotton yarn are

subject to a 4% duty in the European Union (EU), while Least Developed Countries (LDCs) get duty-free access.

Table 2: China's Total Imports of Cotton Yarn and Share of India and Vietnam Year Total Cotton

Yarn imports by China (USD Billion)

Vietnam’s share in total Cotton Yarn imports by China (in Per Cent)

India’s share in total Cotton Yarn imports by China (in Per Cent)

2009 2.35 7.63% 7.75%

2010 3.21 10.44% 12.31%

2011 3.41 13.16% 15.23%

2012 4.95 12.38% 20.38%

2013 6.81 13.20% 29.83%

2014 6.22 20.32% 26.36%

2015 6.37 22.32% 29.32%

2016 5.13 32.53% 20.39%

2017 5.46 37.16% 19.60%

2018 5.85 36.66% 21.75%

Table 3: Cotton Yarn Duty Comparison in Different Markets – India vs. Vietnam European Union (EU) China

India 4% 3.5%

Vietnam 0 0

Source: Confederation of Indian Textile Industry

COTTON AND COTTON YARN PRICES

The gap between change in cotton price and yarn prices have declined after 2014 which however marginally

improved in 2018. This increasing gap between raw cotton prices and cotton yarn prices implies increasing

working capital requirements for the mills; this also reducing their margins. Further, another issue is that India’s

raw cotton is taking entry in various markets at zero duty, instead of being converted to yarn or fabric. This is

affecting employment and the entire value chain from farmers to spinners, weavers and knitters. Going

forward, cotton and cotton yarn prices will remain competitive as mills will have ample fiber supplies (domestic

and imports) to cater to both the domestic and export markets.

The operating margins of domestic cotton yarn spinners are likely to decline due to lower cotton output, rising

cotton prices and moderating demand. India’s cotton production is expected to decline further in cotton season

2019 due to low water availability, volatility in monsoon in major cotton producing states and pest attacks.

Global cotton prices are expected to remain steady at Rs 128-134 per kg.

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Source: Compiled from data from Confederation of Indian Textiles Industry, Textile Times, VOLUME XVI, No. 06,(April 2019).

MINIMUM SUPPORT PRICE (MSP)There has been a continuous increase in MSP of cotton over the years. In 2018-19, cotton MSP is increased by

more than 28 per cent and 26 per cent for medium staple and long staple cotton (YoY basis), respectively (MSP

for Medium Staple Cotton has been raised from Rs. 4020 per quintal in 2017-18 to Rs. 5150 in 2018-19,

whereas for Long Staple Cotton the price is increased from Rs.4320 in 2017-18 to Rs.5450 in 2018-19).

Procurement was deferred because of arrivals expected from late planting, but small quantities are arriving in

markets in Northern India, as prices remain above MSP rates. However, smaller mills would require higher

working capital when they procure cotton at higher prices at the start of the season. The Cotton Corporation of

India (CCI) opened 330 procurement centres across key growing states since October 1 2018. However,

purchases at support price are yet to take pace due to the higher moisture content of over 12 per cent in cotton.

In 2017, CCI had procured less than four lakh bales under MSP operations, due to rapid increase in market

price that went above MSP rates. This year since MSP rates are much higher, the probability of higher volumes

being purchased under MSP is high.

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Source: ‘Textiles and Apparel’ (March 2018) India Brand Equity Foundation (IBEF)

MAJOR PLAYERS Various foreign retailers and brands such as Carrefour, Gap, H&M, JC Penney, Levi Strauss, Macy's, Marks &

Spencer, Metro Group, Nike, Reebok, Tommy Hilfiger and WaI-Mart import Indian textile products. In India,

one of the major players is - Sutlej Textiles & Industries Ltd (STIL) is a leading producer of value-added yarns In

India. Since inception the company is into development of niche products to meet increasingly sophisticated

demands of the Industry. The company has market presence in over 60 countries. It is one of the largest inte-

grated textile manufacturing companies. Largest product portfolios of spun-dyed, cotton blended and cotton

melange dyed yarns. The company’s products are manufactured in spinning mills in Bhawanimandi (Rajas-

than), Baddi (Himachal Pradesh) and Kathau (Jammu & Kashmir) and a home textile fabric division at Dahe-

li(Gujarat).

Arvind Limited is a textile company. The company's principal products/services are finished fabrics and

garments. Its segments are textiles, brands, retail and others. The textiles segment includes fabric, yarn and

garments. The brands and retail segment includes retailing of branded garments, apparels and fabrics. The

textiles segment includes fabric, yarn and garments. The brands and retail segment includes retailing of brand-

ed garments, apparels and fabrics. The others segment includes technical textile, e-commerce and project

activity. It also manufactures cotton shirting, denim, knits and bottom weights (Khakis) fabrics, and jeans and

shirts garments. The Company, through its subsidiary, Arvind Lifestyle Brands Limited, markets branded apparel

and licenses international brands in India. Its brands portfolio includes international brands, such as Arrow, US

Polo, Izod, Elle and Cherokee. It also operates MEGAMART apparel value retail stores.

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Table 4: Major Players in the industry

Sl No. Company Business Areas

1 Vardhman Textiles Ltd. Yarn, fabric, sewing threads, acrylic fiber, garments

2 Arvind Mills Ltd. Spinning, weaving, processing and garment production (denims, shirting, khakis and knitwear)

3 Raymond Ltd. Worsted suiting, tailored clothing, denim, shirting, woollen outerwear

4 Garden Silk Mills Ltd. Dyed and printed fabric

5 Bombay Dyeing and Manufacturing Company Ltd.

Bed linen, towels, furnishings, fabric for suits, shirts, dresses, saris in cotton and polyester blends

6 Sutlej Textiles & Industries Ltd (STIL)

Spun-dyed, cotton blended and cotton melange dyed yarns

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Source: ‘Textiles and Apparel’ (March 2018) India Brand Equity Foundation (IBEF).

Vardhman Textiles Limited is an integrated textile manufacturer. The company is engaged in manufacturing of

cotton yarn, synthetic yarn, woven fabric, sewing thread, acrylic fiber, garments. The company is a piece dyed

fabric manufacturer, and cotton yarn manufacturer and exporter. The company has manufacturing facilities

located in Punjab, Himachal Pradesh and Madhya Pradesh. The company markets its products in the European

Union, the United States. According to its latest annual report 2017-18, the continuous evolution of GST poli-

cies and tax rates did leave an impact on the operations of several industries, including the textile industry. The

company’s revenue declined marginally compared to previous year due to a drop in sales of yarn business. The

company targets to add around 100,000 spindles of capacity, and in fabric business, the company targets to

increase processing capacity from current level of 140 million meters per annum to approximately 180 million

meters per annum.

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Table 5: Government Initiatives Sl No. Scheme Details of the Scheme

1 Technology Upgradation Fund Scheme (TUFS)

Investment was made to promote modernisation and up-gradation of the textile industry by providing credit at reduced rates. A subsidy of Rs 1,400 crore (US$ 216.25 million) was released under this scheme in 2017. Under the Union Budget 2018-19, Rs 2,300 (US$ 355.27 million) crore have been allocated for this scheme.

2 National Textile Policy 2000 Key areas of focus include technological upgrades, enhancement of productivity, product diversification and financing arrangements. New draft for this policy ensures to employ 35 million by attracting foreign investments. It also focuses on establishing a modern apparel garment manufacturing centre in every North Eastern state for which Government has invested an amount of US$ 3.27 million.

3 FDI Foreign direct investment (FDI) of up to 100 per cent is allowed in the textile sector through the automatic route.

4 SAATHI Scheme The Union Ministry of Textiles, Government of India, along with Energy Efficiency Services Ltd (EESL), has launched a technology upgradation scheme called SAATHI (Sustainable and Accelerated Adoption of Efficient Textile Technologies to Help Small Industries) for reviving the powerloom sector of India.

5 Merchandise Exports of India Scheme (MEIS)

The Directorate General of Foreign Trade (DGFT) has revised rates for incentives under the Merchandise Exports from India Scheme (MEIS) for two subsectors of Textiles Industry - Readymade garments and Made ups - from 2 per cent to 4 per cent.

6 Scheme for Capacity Building in Textiles Sector (SCBTS)

The Cabinet Committee on Economic Affairs (CCEA), Government of India has approved a new skill development scheme named 'Scheme for Capacity Building in Textile Sector (SCBTS)' with an outlay of Rs 1,300 crore (US$ 202.9 million) from 2017-18 to 2019-20.

7 Textile Incentives The Textile Ministry of India earmarked Rs 690 crore (US$ 106.58 million) for setting up 21 ready made garment manufacturing units in seven states for development and modernisation of Indian Textile Sector.

INDUSTRY RISK

To increase exports in the textile industry, the Government of India (GoI) had launched a Special Package for

the garment and made-up sectors in 2016. The package offers a Rebate of State Levies (RoSL), additional

incentives are provided under the Amended Technology Upgradation Fund Scheme (ATUFS). Effective Novem-

ber 1, 2017, the rates (incentive rates paid as a percentage of the realized FOB value paid to exporter to com-

pensate for loss on payment of duties) under the Merchandise Exports from India Scheme (MEIS) have been

increased from 2 to 4 percent for apparel, and 5 to 7 percent for made-ups, handloom and handicrafts. Effec-

tive December 19, 2018, the government revised the duty drawback rates of the textile and apparel sector from

2.01 percent to 2.46 percent. For the development of economically weaker Powerloom weavers, and the over-

all development of the Powerloom sector, the government launched a multi-pronged scheme called PowerTex

India. The scheme upgrades and rationalizes old credit and infrastructure schemes with new upgradation and

modernization schemes, and is valid up to March 31, 2020.

India's cotton yarn exports are struggling in the absence of export incentives despite having the world's second

largest spinning infrastructure. Apart from falling exports and excess production over domestic consumption,

some of the other major challenges before the Indian spinning industry are low cotton yield, contamination,

high moisture content, increasing cotton prices during the lean cotton supply season, declining margins of the

spinning industry due to price gap of cotton yarn over cotton, high manufacturing cost due to high interest rate

and power tariff, pending Technology Upgradation Funds Scheme (TUFS) claims, etc. Introduction of GST also

slowed the overall growth of textiles industry to some extent, as the industry faced challenges to cope up with

new tax structure. Rising cotton prices might impact margins of cotton mill spinning industries. Another chal-

lenge is that regional paste attacks may limit cotton sowing and adversely impact cotton yarn production. Possi-

bility of rising wage levels (thus raising production costs) and decline in cotton crop yields in 2018-19 cotton

season also can’t be ruled out. There is also need to cover cotton yarn under Merchandise Exports from India

Scheme (MEIS) to help boost India's exports and penetrate new markets especially in Africa, while enabling the

farmers get a better price for raw cotton. There are also issues of lower capacity utilisation due to poor off-take

of yarn and labour shortage as well as marginal competition from man-made fibre. Another challenge is that

Embedded taxes (Central & State Taxes and Levies) on cotton yarn are not refunded by the way of drawback

and cotton yarn is not covered under the Scheme for Rebate of State and Central Taxes and Levies (RoSCTL)

which reduces the export competitiveness of the spinning industry of India. Hence, bringing cotton yarn and

fabrics under ROSCTL Scheme and extending 3% interest equalization scheme to cotton yarn is also required.

Export incentives for cotton yarn and exploration of newer markets would provide a boost to the industry.

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FOOTNOTES

1. ‘Textile Times’ Volume XVI, No.6(April 2019); Confederation of Indian Textile Industry(CITI) 2. ‘CAI trims cotton crop estimate for 2018-19 at 348 lakh bales’(6 October 2018) The HinduBusinessLine https://www.thehindubusinessline.com/economy/agri-business/-cai-trims-cotton-crop-estimate-for-2018-19-at-348-lakh-bales/article25144579.ece3. ‘Cotton Industry and Exports’(December 2018) https://www.ibef.org/exports/cotton-industry-india.aspx4. India: Cotton and Products Annual: Expected Rebounds in Yields and Higher Mill Consumption Forecasted’(29 March 2019) USDA Foreign Agricultural Service (FAS).5. ‘Varying cotton estimates put mills in quandary’(8 May 2019) The HinduBusinessLine https://www.thehindubusinessline.com/markets/commodities/var-ying-cotton-estimates-put-mills-in-quandary/article27072570.ece6. In March 2019, the state government suspended the licenses of more than a dozen seed manufacturers, and is closely monitoring the upcoming planting season for use of the illegal seeds.See, India: Cotton and Products Annual: Expected Rebounds in Yields and Higher Mill Consumption Forecasted’(29 March 2019) USDA Foreign Agricultural Service (FAS) and ‘HT cotton use: AP lists out suspended varieties’(27 March 2019) The HinduBusiness Line https://www.thehindubusinessline.com/mar-kets/commodities/ht-cotton-use-ap-lists-out-suspended-varieties/article26655525.ece7. Confederation of Indian Textiles Industry https://www.citiindia.com/wp-content/uploads/2019/05/TT-APRIL-2019.pdf8. ‘Lower output, price rise to hit cotton yarn margins’(8 May 2019) Financial Express https://www.financialexpress.com/market/commodities/lower-out-put-price-rise-to-hit-cotton-yarn-margins/1571452/9. Confederation of Indian Textiles Industry, Textile Times, VOLUME XVI, No. 06,(April 2019).10. https://economictimes.indiatimes.com/news/economy/for-eign-trade/indian-cotton-fabric-yarn-exports-fall-due-to-high-duties-study/articleshow/67933119.cms?from=mdr11. India: Cotton and Products Annual: Expected Rebounds in Yields and Higher Mill Consumption Forecasted’(29 March 2019) USDA Foreign Agricultural Service (FAS).12. ‘Cotton Statistics and News (January 2019)No. 41, Cotton Association of India.13. ‘Cotton Corp gears up for MSP operations’ (9 October 2018) The Hindu BusinessLine.14. ‘Cotton Industry and Exports’(December 2018) https://www.ibef.org/exports/cotton-industry-india.aspx15. https://www.ibef.org/industry/textiles/showcase/sutlej-textiles16. http://sutlejtextiles.com/sutlej-overview.html17. https://www.ibef.org/industry/textiles/showcase/arvind-limited18. https://www.ibef.org/industry/textiles/showcase19. https://www.ibef.org/industry/textiles/showcase/vardhman-textiles20. Vardhman Textiles Ltd. Annual report 2017-18; p-14.21. The scheme provides a one-time capital subsidy (ten percent of investment capped at approximately USD 2.8 million) for investments in employments and technology intensive segments of the textile value chain. The scheme is valid for all segments except spinning for the period 2016-2022.22. ‘India: Cotton and Products Annual: Expected Rebounds in Yields and Higher Mill Consumption Forecasted’(29 March 2019) USDA Foreign Agricultural Service (FAS) https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Cotton%20and%20Products%20Annual_New%20Delhi_India_3-29-2019.pdf23. According to a Livemint news report, estimates from the Cotton Advisory Board point to production of 36 million bales (one bale = 170kg) during the 2018-19 cotton season compared to 37 million bales in the previous year. Drought and uneven rainfall in Gujarat and Maharashtra is likely to pull down the average yield. However, according to K. Selvaraj, secretary general of the Southern India Mills’ Association, “The situation is comfortable after the arrival of the initial crop in the market.” See, ‘Why mills aren’t worried about low cotton production yet’(6 December 2018) Livemint https://www.livemint.com/Money/iBpvBWLucZGtURl-wHRze2I/Why-spinning-mills-are-not-worried-about-low-cotton-producti.html.24. With the aim in making India’s products more competitive in the global markets, the scheme provides incentive in the form of duty credit scrip to the exporter to compensate for his loss on payment of duties. The incentive is paid as percentage of the realized FOB value (in free foreign exchange) for notified goods going to notified markets. To determine the quantity of incentive, the countries have been segregated into three groups. Incentives on export of each product at 8-digit level (ITC HS codes), depend on the group in which its destination country belong. See for details, https://www.eepcindia.org/MEIS/about-MEIS-scheme.aspx25. https://www.news18.com/news/business/covering-cotton-yarn-under-meis-will-help-boost-indias-exports-textile-industry-body-2032879.html26. ‘Varying cotton estimates put mills in quandry’(8 May 2019)The HinduBusinessLine https://www.thehindubusinessline.com/markets/commodities/var-ying-cotton-estimates-put-mills-in-quandary/article27072570.ece27. https://texprocil.org/ChairmanDesk.htm

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cotton yarn industry outlook - Infomerics Ratings

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