*****From Tirupur to Panipat, soaring cotton prices are searing India’s textile exporters and mills – The Economic Times

Clipped from: https://economictimes.indiatimes.com/small-biz/sme-sector/from-tirupur-to-panipat-soaring-cotton-prices-are-searing-indias-textile-exporters-and-mills/articleshow/91932307.cms

SynopsisHigh cotton prices are plaguing textile firms, and many mills are being forced to shut operations. This situation could have been avoided with some corrective measures.

If the rise in food prices has changed your dietary preferences, now be ready to change your sartorial preferences.

“A cotton saree we used to sell for Rs 2,500 a year ago now costs Rs 3,100 — 25% more,” says Ritu Oberoi, founder of ForSarees, a homegrown apparel brand. She blames the price spike on the rampant increase in cotton prices. People don’t spend a lot on cotton clothes and so passing on the cost is not an option. “Companies like ours, where 80% of the product line is cotton based, are seeing shrinking margins,” says the entrepreneur.

Sumit Jain knows what Oberoi is going through. His Delhi-based Kanin Originals, which makes and exports cotton garments, is among the thousands of textile and clothing firms in the country that have been reeling from a relentless surge in cotton prices. “Cotton prices have gone up 125-135% in the last 18 months, making it hard to sustain operations and sign any deal with overseas buyers. My cotton and readymade garment orders have shrunk 75% now,” he says, adding that the going is getting more difficult by the day. “We aren’t thinking of profit margin now but just about keeping the factories running somehow. The way we used to do business is history.”

The textiles industry had high hopes that a post-pandemic demand surge would give some sales boost and help them make up for some of the Covid-lockdown losses. But the severe disruption in the global supply chain because of the Russia-Ukraine conflict and the Covid crisis in China has made cotton manufacturers and exporters realise that they are staring at a long spell of uncertain times. Cotton prices in the global market have increased to almost an 11-year-high on the Intercontinental Exchange, significantly exacerbating cost pressures for the industry. If that wasn’t enough, the sharp spike in inflation has brought down discretionary spending. The domestic textile industry is now saying the heat is becoming too much to bear.

Jain of Kanin Originals, which exports readymade garments to several destinations, claims only a few firms are operating at 40% or more capacity. “Many mills across the country have reduced their production to one-third. Several firms are operating only one shift daily, and are enforcing a minimum of three-day holiday per week. They are unable to run the mills because of the high cotton prices,” he says.

Forced to shut down
The South India Spinners Association (SISPA) says its members don’t have adequate working capital to purchase cotton. There has been a 53% rise in cotton prices between January and May alone, says SISPA President J Selvan, whereas yarn prices increased by only 21% in that period. “We are incurring a loss of Rs 50-60 a kg by procuring cotton at current rates. How will the mill owners run their factories?” asks Selvan, adding all associated mills have suspended operations till the market stabilises.

Ritu-Oberoi2

Margins have shrunk for entrepreneurs like Ritu Oberoi, founder of ForSarees.

Industry bodies blame the worsening of the demand-supply equation on cartelisation, hoarding and market speculation. “The market (controlled by traders) is also not supporting mill owners. So, we had no option. The government has to intervene urgently if it wants to save the livelihood of thousands of people dependent on the cotton value chain,” Selvan adds.

The Apparel Export Promotion Council (AEPC) has warned that the continuous spike in the cost of raw materials might have a serious bearing on the country’s export target of $19-20 billion for the current financial year. Notably, in 2021-22, apparel exports were at $16 billion.

The apparel industry employs around 14.5 million people and 70% of the units are MSMEs, says AEPC Chairman Narendra Goenka.

The impact of the price hike hits the smaller players harder. Vikas Singh Chauhan, Director, Home Textile Exporters Welfare Association (HEWA), says the domestic home textile market is worth Rs 60,000 crore; of which 60-65% of revenue is from export. “In this segment, over 80% are MSMEs who are finding it difficult to procure cotton supplies. The cost of production (COP) has so far increased by 200% against last year. For recycled cotton-based items, COP has now soared up 50-70%,” says Chauhan.

HEWA estimates orders in cotton home textiles are down by 30-60%. Spinning mills have no option but to shut looms as margins have evaporated. Factories are processing older orders on losses. New order bookings in the 100% cotton segment have fallen by more than 50%.

Big blow
The cotton price spike has hurt players of all shapes and sizes, claims other stakeholders. Ahmedabad-based Nandan Terry Limited points out that cotton makes up 65% of its operational costs. Ronak Chiripal, the firm’s CEO, says global trade has been affected and the pandemic has altered the spending pattern of consumers. The crop failure last season in India, the US and Australia, as well as the US ban on cotton coming from certain areas of China and Uzbekistan have added to the crisis.

“Manufacturers and exporters are now pinning their hopes on a good cotton season but that is a long shot,” Chiripal says, adding that the firm tried to pass on the price increase to customers but the response wasn’t encouraging. It is getting difficult by the day to maintain working margins because of high cotton and logistic prices, he adds.

Cotton-Prices

The Covid-induced focus on personal hygiene had led to an increase in demand for home textiles, especially bedsheets and towels. Industry players worry that the high prices will have a bearing on that demand also.

The situation is a reason for worry as the country’s readymade garments (RMG) industry is the largest segment in the textiles and apparel sector, and accounts for approximately 50% of the industry’s sales. When stakeholders in this segment resort to lower capacity utilisation because of margin squeeze, it could have a ripple effect across multiple industries.

Navin Rao, co-founder of the Kaftan Company, says given the significance of cotton production within the country and its international demand, this is an unfortunate situation. “While the surge in demand for cotton after Covid has been positive, the lack of supply has played its part negatively, and this needs to be addressed sooner rather than later.”

Lured by export
On the condition of anonymity, an official of a well-known export house says some industry players have found a way to work around the problem, but the country would end up losing in the long run. “We used to export finished goods, but not any longer. Why take the hassle? The company has now turned to yarn export — a much more profitable move for now. We procured yarn at Rs 220 a kg from the open market and exported it at a minimum of Rs 270. That way, we also made use of the government’s various export incentives.”

These incentives add up to about 6% of the exported value. For textile raw material exports, the government gives sops under the Remissions of Duties and Taxes on Exported Products and duty drawback schemes. These incentives have encouraged yarn and cotton exports, affecting the garment and apparel industry. Experts caution the government should intervene urgently and correct this imbalance.

The industry is unhappy that the government is not taking decisions fast enough. For example, the government had on April 13 removed import duty on cotton till September 30, 2022. This meant that the customs duty on raw cotton has been reduced from 10% to nil. The industry has been demanding this since October 2021. While the textile exporting community hailed the decision, several exporters called the decision “late” by at least a few months.

Need for government decision
Exporters claim the problem worsened because of the government’s incentives on raw materials’ exports. A long-standing demand of the industry has been to put some curbs on yarn and cotton exports. Competing nations like China, Vietnam and Bangladesh have been benefitting at the expense of the domestic industry because of an unchecked flight of raw materials from India.

Cotton-Prices---June-2021-t

The AEPC suggests the government curb the rampant exports of cotton and cotton yarn by imposing some quantitative restrictions immediately. It wants a reduction in the export benefits on cotton and cotton yarn, and cotton to be declared an essential commodity — just as Malaysia has declared it in case of palm oil.

“India exports raw material primarily to only three countries — Bangladesh, China and Vietnam. Of these, Bangladesh and Vietnam are India’s competing RMG players. This makes RMG exports from India price-uncompetitive,” says Goenka, the AEPC chief.

Encouraging exports of value-added products such as apparel, instead of raw materials like cotton and cotton yarn, is the way to go. The price realisation and foreign exchange gains on garment exports, as value-added products, are much higher than those gained from raw material exports.

Explaining this, the AEPC chairman claims that the export of raw cotton fetches approximately Rs 275 a kilo; converted to yarn it fetches Rs 400 a kilo. Whereas a kilo of garments exported with all its value additions can fetch approximately Rs 1,200 a kilo, he adds.

Another issue aggravating the crisis for the textile industry is cartelisation, which has lately been fuelled by hoarding and market speculation. Several industry organisations blame this as the key reason for the sorry state of affairs. At the very onset of the cotton season, claim stakeholders, large cotton traders and MNCs purchased huge quantities of cotton and stockpiled it. A significant quantity was also exported.

Be it Karur or Panipat – the plight of apparel manufacturers is the same across leading textile hubs. Their only hope is that the government would do something to help them — and fast.

(Edited by Ram Mohan. Illustrations by Mohammad Arshad)
(Originally published on Jun 01, 2022, 10:34 AM IST)

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