The South India Textile Research Association, Coimbatore
The CPQ studies (costs, operational performance and yarn quality quarterly inter-mill studies), a pioneering service introduced by SITRA nine years ago (1997), have been well received by the mills. The participating mills have initiated a number of measures to reduce costs, change product-mix, improve productivity and realise high yarn prices. These studies have now become an integral part of SITRAs services to mills. Two studies are being conducted every year covering 2nd and 4th quarters.
Using the data furnished by the mills in the last 10 CPQ studies (Q2 2001 to Q4 2005), a detailed analysis has been made on the changes in yarn prices and cotton costs during the 5 year period.
2. Profile of the participant mills
Number of mills participated in each of the 10 studies ranged from 150 to 200. Of the total mills, about 80% of them are from South India and the rest are from other regions. Nearly 10% of the mills are export oriented units (EOUs) and close to one-half of them are exporting mills.
3. Changes in cotton yarn prices and cotton costs
Average cotton yarn prices and cotton costs prevailed during 2001-05 for some major counts, which are common for all the 10 studies, have been analysed to study the changes taken place during this period. The findings are given below for both domestic and export yarns.
3.1. Domestic yarn prices
During the last 5 years, overall price of domestic cotton yarns both for weaving and knitting has remained virtually unchanged (Table 1). The prices, however, ruled 7% to 18% higher (except 100s C) in the 2nd quarter of 2004 as compared to the 2nd quarter of 2001 and 3% to 27% higher (except 100s C) than the 4th quarter of 2005. Count-wise comparison of prices revealed a drop of about 7% in 20s and 1% to 3% fall in 40s, 30s CH and 40s CH yarns. On the other hand, prices showed an increase of 11% in 100s C and 4% in 60s C and a marginal rise of 1% to 2% in 30s and 40s C yarns (Figure 1).
1. Domestic cotton yarn prices during the last 5 year period (2001-05) remained virtually unchanged.
2. Export cotton yarn prices, however, registered a significant drop of about 9% during this period.
3. Yarn prices fluctuated widely between different quarters for both domestic and export yarns the overall mean deviation being about 5.5%.
4. Cotton costs recorded a substantial drop of about 17% in the case of domestic yarns and 23% in the case of export yarns.
5. Fluctuations in the cotton costs during the 5 year period is very high with an overall mean deviation of about 10%.
6. Cotton cost relative to yarn price registered a big drop of about 18% in the case of domestic yarns and about 15% in the case of export yarns. In absolute value, this fall is around 10 percentage points which is almost 5 times the level of net profit margin a spinning mill can earn under normal trading conditions.
7. Net out-put value of different counts (except 60s C-Ex) showed, on the average, an increase of Rs 1830 per spindle per year during the 5 year period, ranging from Rs 1240 in 100s C to Rs 2580 in 40s C counts. In 60s C-Ex, the NOV registered a marginal drop of Rs 250 per spindle per year.
8. Two-thirds of the total increase in NOV interms of per spindle per year (except 60s C-Ex), is due to increase in NOV per kg and the remaining one-third is because of rise in production rate.
Source: The South India Textile Research Association, Coimbatore (SITRA)
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In each count, the prices fluctuated widely between the different quarters with a mean deviation of 6.5% to 7.8% in 20s, 30s, 40s and 100s C and 4% to 5% in 30s CH, 40s CH, 40s C and 60s C yarns (Figure 2).
3.2. Export yarn prices
Export yarn prices during the 5 year period, showed a sharp drop of about 9%, ranging from 3% in 40s C to 14% in 60s C counts (Table 2 and Figure 3). The fluctuations in yarn prices in different quarters, as measured by the mean deviation, ranged from 4.6% in 40s C to 6.8% in 20s CH counts (Figure 4). The overall mean deviation is almost same as that prevailed in domestic yarns.
3.3. Cotton cost for domestic yarns
When compared to the 2nd quarter of 2001, cotton cost per kg of yarn registered a substantial drop of about 17% during the 4th quarter of 2005, ranging from 7% in 30s CH to 23% in 40s counts. However, during the 2nd quarter of 2004, the cotton cost was about 12% higher (except 100s C) than Q2 of 2001 and about 35% higher than Q4 of 2005 (Table 3 and Figure 5).
Fluctuations in cotton cost in each count during the 5 year period are found to be high at an average mean deviation of about 10%, which is 65% more than the mean deviations in yarn prices (Figure 6). Such wide fluctuations in cotton costs and yarn prices would affect the working of the mills significantly.
cost for export yarns
Cost of cotton meant for export yarns, recorded a huge drop of about 23% during Q4 of 2005 as compared to Q2 of 2001 (Table 4) which is about 30% more than the fall in cotton cost for domestic yarns. The cotton cost for export yarns also fluctuated widely between the different quarters, the average mean deviation being about 10%.
4. Cotton cost relative to yarn price
As far as the economic production of cotton yarn is concerned, the impact of cotton cost is more over-riding than any other single element of cost. This is because cotton cost accounts for about 60% of the yarn price, ranging from 50% in fine counts such as 80s to 70% in coarse counts like 20s. With spinning mills earning an average net profit margin (that is, after depreciation and interest) of only 2% of sales during normal trading conditions, changes in cotton cost relative to yarn price play a very crucial role in determining a mills profits or otherwise.
4.1. For domestic yarns
A comparison of cotton cost relative to yarn price during the 5 year period shows a substantial drop of about 18%, ranging from 6% in 30s CH to 26% in 60s C counts (Table 5 and Figure 7) which can be largely attributed to the fall in cotton cost. In absolute value, this fall is 4 to 15 percentage points which is almost 5 times the level of net profit margin a spinning mill can earn under normal trading conditions.
Another important observation made from Table 5 is that the cotton cost relative to yarn price prevailed during 2005 are the lowest values recorded during the last 5 years, almost in all the counts.
4.2. For export yarns
In the case of export yarns also, the cotton cost relative to yarn price registered a huge drop of about 15% during Q4 2005 as compared to Q2 2001 (Table 6). Though the yarn prices recorded about 9% drop during the 5 year period (Table 2), nevertheless, the 23% fall in cotton costs (Table 4) led to a big drop of 15% in cotton cost relative to yarn price.
The drop in cotton cost relative to yarn price during 2001-05 would have benefited many mills manufacturing cotton yarns.
5. Movement of yarn prices during the last 4 decades
An earlier study by SITRA on the movements of yarn prices over a period of 30 years has shown that over the long-term, yarn prices increase at the rate of 7% to 8% a year, that is, prices double in every 9 to 10 years. To illustrate, in 1976 the average yarn price ruled at about Rs 24 per kg ranging from Rs 14.70 per kg in 20s, Rs 17.50 in 30s, Rs 18.20 in 40s, Rs 23.80 in 60s, Rs 29.40 in 80s and Rs 39.10 in 100s C counts. Since then, the prices had increased by about 5 times to an average of Rs 127 per kg in 1999, ie at the rate of 7.5% a year. However, the present study shows that during the last 5 years, the domestic yarn prices virtually remained unchanged, while export yarn prices registered about 9% drop. This clearly indicates a fact that presently, the profitability of the mills depends largely on the movement of cotton costs.
6. Net out-put value
Profitability of a mill is primarily determined by the net out-put value (NOV), ie yarn price less raw material cost. The NOV realised by the mills in different counts during Q2 of 2001 and Q4 of 2005 is presented in Table 7.
Out of 13 counts, the NOV showed a large increase in 12 counts during the 5 year period. The increase in NOV is of a high level (over Rs 2000 per spindle per year) in some counts (30s, 40s C, 40s CH, 40s C-Ex and 20s CH-Ex) whereas in the remaining counts (except 60s C-Ex), it lies between Rs 1200 and Rs 1800 per spindle per year. In 60s C-Ex count, the NOV, however, registered a marginal drop of Rs 250 per spindle per year. The entire increase in NOV will be directly reflected by a corresponding increase in contribution and profitability in these counts.
Production per spindle per 8 hours in ring frames, during the 5 year period, registered about 10% increase. Two-thirds of the total increase in NOV interms of per spindle per year (excluding 60s C-Ex), is due to the increase in NOV per kg and the remaining one-third is because of rise in production rate. In 60s C-Ex count, however, the NOV showed a drop of Rs 4 per kg and the production rate remained at the same level (63 g per spindle per 8 hours).
Further analysis shows that during Q4 2005, the NOV differed widely by about 2.5 times between counts. Among the various counts, 20s CH-Ex yarn earned the highest NOV of Rs 10480 per spindle per year whereas 100s C count realised the lowest NOV of Rs 4290 (Figure 8).