Crisis in Spinning Industry

Spinning mills are choked with yarn stocks, and it is estimated that mills are carrying stock of about 500,000 tons versus the normal stock of 150,000 tons. CII and CITI have pressed a panic button, and apart from taking a decision to reduce production by 33%, have also requested the government to reinstate DEPB on yarn export, reinstate interest rate subvention scheme, and to allow deference of interest repayment by a year.

Let us probe into the reasons for this crisis. It all began at the end of 2010 when the Indian government, in order to rein escalating cotton yarn prices, decided to restrict cotton yarn exports to 720,000 tons for the FY 10-11. All the exporters were asked to register their pending exports. This request was met overwhelmingly, and the total registrations were much above the total allocated quantity. Before this, the government had already restricted the export of raw cotton to a maximum of 5.5 million bales.

The announcement had the desired result, and prices in domestic markets softened, but at the same time, prices in the international market soared. This led to the stabilization of domestic yarn prices at around ₹250/Kg. for Ne 30/1 Combed (down from the peak of ₹295/Kg.). Realization in export was still around ₹290/Kg., so the mills decided to wait until fresh quotas were allocated for the remaining quantity rather than reducing the prices in domestic and offloading the stocks. Domestic buyers also waited patiently as they knew that with export restrictions in place, prices won't sustain for long; moreover, their costing didn't allow them to absorb these yarn prices.

In the beginning of the year, things started getting murkier. Chennai high court ordered closure of all the dyeing units in Tirupur. Tirupur accounts for more than 20% of Indian garment exports, and this is the reason Tamil Nadu has the highest number of spinning mills, mostly located around Tirupur. This was the first blow.

In February, Excise duty of 10% on garments was announced in the union fiscal budget for 11-12 and was implemented with immediate effect. Since this was to affect the entire value chain, a nationwide protest was announced coupled with strikes and closures. This resulted in a slowdown of business, affecting domestic consumption. This was the second major blow.

Internationally, Egypt went through internal civilian uprising followed by Tunisia and Libya, Greece, Ireland, and Portugal facing mounting debt burden, leading to a slowdown of business.

By the end of March, it was total chaos. As soon as the yarn export quota for FY11-12 was opened by the government for registration, there was a scramble among exporters to dispose of the maximum quantity. Since almost everybody was sitting on stocks and there was a huge gap between domestic yarn prices and prevailing export yarn prices, a price war broke out. The tide subsided when there was almost no difference between domestic and export yarn prices. In a short period, the yarn prices came down from US$6.50/Kg. to US$5.50/Kg.

Adding fuel to the fire, NY Cotton futures started tumbling down. From the peak of US$2.10/lbs, it went down till US$1.44/lbs in just a matter of few weeks. Polyester followed suit, and in India, PSF prices tumbled from ₹135/Kg. to ₹92/Kg.

As the steam started losing out of yarn prices, a chill penetrated in both domestic and international buyers. All became suddenly cautious, and even a flutter was heard across the globe. For a few weeks, we witnessed crumbling prices, a free fall, with negligible sales.