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Weakening cotton prices hard hit Chinese textile firms
25
Jun '11
Volatility in prices of raw inputs and withering bank loans due to the Government's stringent monetary policy are causing the textile firms in China to face hard times this year.

There are only a few textile firms which have a potential to withstand these adverse situations for long, and around 70 percent of them have already cut down on their production.

A number of textile units, which are concentrated in Shandong and Jiangsu provinces, are finding it difficult to withstand the dual challenges.

A majority of the firms are facing financial crunch as a major part of their capital has been blocked in cotton stocks which they initially procured at high-prices. With the drying up of bank loans, these companies now need to search for other means to repay their earlier loans.

Prices of cotton, a raw input which comprises around 70 percent of the total cost of textile manufacturing, spiralled during September to March to touch RMB 34,000 per ton, but then it suddenly plummeted by about 30 percent in May to RMB 24,000.

After witnessing such a fall in cotton prices, the textile firms are now buying stocks more carefully on apprehensions that prices may further fall. However, those firms which earlier accumulated large stocks at high prices are certain to suffer heavy losses.

A number of textile firms made bulk purchases of the commodity towards end part of last year at an average price of around RMB 30,000 per ton. These stocks have yet not been exhausted completely.

The worse part of the situation is that majority of the textile firms which made good profits from soaring cotton prices last year, spent this money towards enhancing their production capacity, without taking into account the possibility of price fluctuations in future.

Until now this year, the People's Bank of China has hiked the reserve requirement ratio for banks six times and has even raised the interest rate a couple of times. This had made it difficult for the medium and small firms to avail bank loans.

In addition, for some companies, the loans obtained earlier are now due for repayment and hence, it is not possible for them to obtain new loans from bank. This is forcing such companies to turn to private lenders for sustaining their business.

For instance, as per the Wenzhou Council for Promotion of Small-and Medium-Sized Enterprises statistics, the private lending in the city has crossed RMB 100 billion this year, as against last year's total private lending of RMB 80 billion.

According to the experts, owing to the problems coming in way of obtaining bank loans, most of the textile firms in China have either suspended production or approached private financers for obtaining finance, which is likely to later hit their finances.

Fibre2fashion News Desk - China

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