Yarn Imports Causing Upheaval For Raw Cotton
January 8, 2014 With ongoing growth of the textile and clothing industries, especially driven by increased per-capita consumption in Asia, the yarn trade could continue to grow at a rate of 2%-3% annually. However, we must keep in mind that cotton-based products represent a much lower percentage of fiber use in textiles and clothing than man-made and regenerated fibers. Moreover, increased use of cellulosic fibers like viscose, bamboo, tencel and modal is also effecting consumption of cotton.
This change in consumption patterns is due to many factors that include better material handling, fewer quality issues and better end products. The following may result in the continued substitution of 100% cotton yarn with blended constructions in the coming years.
The Yarn Trade’s Impact
Recent upheaval in the international yarn market, due to China’s extraordinary purchasing, has had a significant impact. This has basically been an arbitrage and not a fundamental of business.
Due to high domestic cotton prices, yarn is being imported by Chinese textile manufacturers because it’s more economical for them. This is particularly true with the basic coarse and medium counts of yarn, where margins are especially tight. Moreover, owing to rising input costs in China, yarns that involve labor-intensive processes such as mélange/multifiber, twisting, etc., are also being substituted with imports. The Chinese are focusing more on high-end products and the fashion industry.
Another important factor that cannot be ignored is that big trading corporations and traders in China – who have excessive liquidity in their systems and sometimes direct those funds into purchases of a specific commodity – are distorting the market. This has contributed to Pakistan and India exporting record quantities of yarns to Chinese traders during the past couple of years.
However, it is difficult to predict whether this trend will continue, as there are constant rumors of changes in Chinese cotton policy. Certainly, the present policy is not sustainable and changes are likely to occur. But until a long-term policy is announced, rumor-based volatility will continue to hurt businesses.
One cannot easily plan for a successful future under this scenario. You just have to compensate and predict government policy options and make decisions accordingly. China’s policies will remain a key influence on yarn trade and the cotton industry over the next few years. One thing is clear, however: China will increasingly look toward importing yarns.
Stability Will Help Prices, Consumption
Mills face serious challenges when cotton prices remain highly volatile, and yarn prices behave quite differently from raw cotton prices. In order to manage market volatility and uncertainty, mills are now adopting appropriate cotton purchasing strategies and policies, and taking a much longer look at inventory price risk management.
Mills need honest, clear and consistent practices to help remove this volatility and uncertainty. Moreover, mills are increasing their direct contact with end-users to more accurately estimate their requirements and to plan their capacities accordingly. In order to minimize dependency on certain markets, mills are endeavoring to establish a broader customer base and are investing in product diversification.
A Challenge from Alternate Fibers
Coarser and medium-count cotton is maintaining its market share well in Pakistan, as alternate fibers are in distress due to cheaper Pakistani cotton prices. But the situation is different for fine count yarns; spinners are struggling to pass heavily inflated ELS cotton prices on to their customers. The premium of ELS cotton over the Cotlook A index has risen well above its historical average.
Use of high-tenacity cellulosic fibers such as tencel, microtencil, viscose, modal and bamboo is increasing and gaining popularity in the fashion and apparel sectors. Using tencel to replace cotton is commercially viable. Similarly, viscose is easier to handle as a fiber and is better in terms of pricing. Sustainability and environmental concerns are also playing a key role. The resources required to grow 1 kg of cotton are far more than needed to produce a similar amount of these alternative fibers. In order to maintain current ELS cotton consumption, it is important that ELS prices stay at a bearable premium over the A Index. Otherwise, ELS customers may turn to more reasonably priced alternatives.
In order to maintain cotton’s global prominence, the industry should focus on:
- Telling customers how cotton can positively impact the livelihood of ordinary farmers.
- Convincing cotton growers and ginners to reduce contamination and foreign matter so that handing and end-product control can be improved.
- Highlighting that cotton is a natural product – something that research shows plays well with wealthier consumers.
Challenges and Opportunities in Pakistan
Stagnancy in cotton production, a deficit in the domestic cotton balance sheet, quality issues, the high cost of energy, inflationary pressures, government subsidies, and incentives in competing countries are all issues facing Pakistan’s cotton industry.
As the saying goes, when the times get tough, the tough get going. We should not always be competing on cost and trying to be the cheapest. Pakistan has to look beyond the traditional markets and needs to invest in product differentiation, value addition and market diversification. Mills also need to work on costs, both individually and collectively. Installation of some collective small power plants would improve power efficiencies.
Pakistan has a good domestic cotton market and the best hope for salvation and improvement lies in greater vertical integration and value addition. By creating a reasonable value chain, it will be easier for us to handle various challenges arising due to sudden changes in international commodity and financial markets. Also, improvements from cultivation to manufacturing garments and apparel will bring more efficiency and improve cotton use in Pakistan.
Pakistan is working towards the GSP Plus status. Manufacturing is a tough and competitive business, but out of such struggle, progress almost always surfaces.
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