China is the world leader in yarn spinning with more than 250 million spindles and 35.38 million tonnes of production, and both cotton and polyester yarn being significant constituents. India is the 2nd largest producer of yarn, with 50 million spindles and 0.75 million rotors. It produces 6.6 million tonnes of spun yarn, of which 61% is cotton yarn. The Indian government has been largely promoting exports in its textile sector, and high production of yarn can be attributed to the constant improvement of existing units and addition of new spinning capacities, with the aid of domestic and foreign investments (100% FDI in textiles).
China remained an undisputed world leader in yarn spinning until 2011-12, thereafter, other South-East Asian nations began increasing their respective market shares. These countries emerged as the hub of yarn spinning due to easy availability of raw materials such as cotton, jute and other fibres and high crop subsidies along with cheap and skilled labour. However, in contrast, the labour prices in China have been continuously increasing. Additionally, the Chinese government began accumulating raw cotton stock for the benefit of farmers (so as to award them fair price), which along with import restrictions on cotton, led to higher internal prices. This, in turn, forced the mills in the country to directly import cotton yarn (low import duties on yarn) from countries such as India, Vietnam, Bangladesh, etc., rather than produce yarn at inflated costs. The increasing dependency of China on imported cotton yarn is shown in the graph below. In addition, the table below represents that out of the top 10 cotton yarn exporting countries, Asian countries hold a massive 74% share in exports, with India being the leader.
India’s export of cotton yarn to China had been on a rise since 2011-12, however, exports fell by almost 38% in FY 2015-16 as shown in the above graph. China shifted its focus towards more low-cost suppliers such as Vietnam, which had already surpassed India in exports of garments in 2002. Similarly, another factor causing the decline was a policy change with regard to stockpiling of raw cotton in China. The country stopped the accumulation of raw cotton after a span of three years and alternatively offered subsidies to farmers. This made domestic cotton cheaper and spinning mills relied on locally produced cotton, this plummeted the imports of yarn. However, in short run, this policy negatively impacted the Chinese yarn manufacturers. The low prices of raw material, which are positively correlated with the selling prices of yarn, in turn, pushed down the margins on cotton yarn as the advantages of low price had to pass on to the customers. Moreover, the low crude oil prices adversely affected the polyester yarn manufacturing in 2015 and 2016.
Televisory compared the results of China Weaving Materials with Vardhman Textiles of India in order to understand the revenue and cost structure of the industry. China Weaving’s revenue almost doubled in FY 2015 despite adverse economic conditions due to the acquisition of Huachun with revenues of CNY 527 million. The COGS made up for a large proportion of the total OPEX as reflected in the below table. Although the COGS dropped for China Weaving in the FY 2015 because of a drop in the prices of the raw materials as mentioned earlier, the revenue per ‘000 MT also fell as the selling price of the yarn had to be adjusted in accordance.
Furthermore, any change in the economic policy by China related to yarn and materials used in its production is bound to have a global impact on the prices. The sudden low demand of cotton yarn from China resulted in a crash in prices in India as well, thus, affecting Vardhman’s revenue per unit.
An analysis of the operating expenses sans COGS shows that Vardhman’s expenses were on a higher side due to the execution of organisation wide consolidation activities to meet the global industry benchmarks. Vardhman also incurred large employee expenses, it employs staff equivalent to almost seven times of China Weaving. Vardhman’s margins were positive when combined with its fabric manufacturing segment, however, on a standalone basis, the yarn segment displayed negative margins because of volatility in the global market. Consequently, the drop in margins from EBITDA to EBIT was higher for Vardhman due to its large asset base, thus, yielded higher depreciation expenses than China Weavings by almost 5%.
On the other side, the rise in operating expenses for China Weavings was due to acquisition costs of Huachan, this was offset by the revenue added through acquisition and thus, its operating expenses remained identical with the previous year. The major dent in the net margin was because of a nearly 200% increase in financial costs and interest expenses as Huachan was consolidated into China Weaving’s accounts. Notably, China Weaving’s net margin fell drastically in FY 2014 due to losses suffered from the fire, whereas the acquisition occurred in 2015.
In conclusion, apart from India, other south-east Asian countries like Vietnam and Bangladesh have been leading the overall textile manufacturing, especially the garments industry. These countries are expected to outshine in the yarn sector as well due to cheap land and labour. Moreover, the consumption of yarn is expected to increase proportionately with the demand for garments because of rising urbanisation and disposable incomes. In a scenario where China’s stock of raw cotton depletes, it would once again resort to imports in the long run. Additionally, the increase in the cost of labour and power in China may uplift the yarn exports of its Asian counterparts further.
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