India's Cotton Consumption Damaged by Weaker
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AUGUST 26, 2019 JERNIGANGLOBAL.COM ISSUE NO. 1033 CHINA DOMESTIC CHINA STATE OWNED XINJIANG PRISON CAMPS ICE FUTURES REMAIN APPAREL SALES SET TO COMPANIES DRIVE LEAD TO CALL FOR WEAK AS TRADE CONTRACT IN 2019 OVERCAPACITY BOYCOTT OF XINJIANG WAR MOVES TOWARD COTTON DISENGAGEMENT THE CHINA IMPACT: INDIA’S COTTON CONSUMPTION DAMAGED BY WEAKER CHINESE COTTON YARN DEMAND he drop in demand for cotton and cotton yarn has July to only 12,000 tons from 40-50,000 tons a month Tleft China’s ports awash with unsold cotton and early in 2019. The competitiveness of Indian yarns cotton yarn stocks. Unsold port stocks of cotton at was first affected by the divergence of domestic cotton Qingdao are near 350-400,000 tons, which is believed prices from international price levels. Furthermore, the to be maximum capacity. Zhangiagang in Jiangsu, devaluation of the RMB against the USD has added to a smaller river port within a free trade zone, is a importers woes, as domestic yarns become cheaper. second port used to store imported cotton. Unsold India has been a key exporter of open-end yarns to port stocks have presently reached a new record of China, but these yarns are no longer competitive. more than 80,000 tons, which is more than a 30,000 tons increase during the past 30 days. Unsold stocks The downturn in Chinese cotton yarn demand has of imported cotton yarn are estimated at 100,000 caused significant problems for India’s non-vertical tons, with approximately 40,000 tons stored in spinners that are primarily focused on exports. Chinese Jiangsu and Zhejiang warehouses, 40,000 tons in demand for imported cotton yarn from India is not Guangdong warehouses, and the balance in north likely to return anytime soon. The reason for the China warehouses. July cotton yarn imports fell to narrowing of the premium of the Chinese domestic 133,000 tons, which was down 32% year on year. cotton price to international values is the weakening Yarn imports from Vietnam are being maintained due of cotton demand and oversupply of domestic unsold to the large number of Chinese-owned spinners that cotton. The price difference between the September have operations in Vietnam, with July volume reaching ZCE cotton futures contract and the Cotlook A Index, 65,000 tons. The sharpest drop in cotton yarn imports adjusted for VAT, is nominal, which makes domestic has come from India, where imports fell sharply in cotton yarn much more competitive against imports. 1 AUGUST 26, 2019 JERNIGANGLOBAL.COM ISSUE NO. 1033 China’s domestic cotton market is flooded with unsold cotton, Xinjiang ginners are still holding unsold 2018/2019 crop, traders are holding unsold stocks, mill inventories are up, and unsold stocks at port warehouses are at record levels. These conditions have left spinners in a very good position to secure a discount for the purchase of any volume. However, some Xinjiang 2018/2019 crop, which is low quality, poor uniformity, and high contamination, is reported to be unsellable. Chinese demand for cotton yarn, cotton/poly, and polyester yarns is weak. Spinners and weavers are in no mood to expand inventories, and downstream weavers and knitters are facing record unsold inventories. The weakest part of the supply chain is in weaving and knitting, which has sizeable overcapacity issues. The hardest hit segment is fluid jet looms, which includes the air-jet and water-jet loom segment. The air-jet loom uses a jet of air to propel the weft yarn through the warp shed instead of the traditional shuttle. Both are used for household and apparel fabrics, but water-jet technology is designed for man-made fibers and is unsuitable for hydrophilic fibers, such as cotton. Some estimates have this group of mills holding as much as nine million square meters of unsold fabric. Unsold inventory, lack of cash flow, and credit issues are evident throughout the supply chains. Some mills are demanding payment in cash because of concerns, even with companies which they have had long-term relationships. A price war also has broken out, as some refocus on domestic demand. This disruption will weavers and knitters seek to make sales at almost any result in a significant change in trading patterns due to price in order to get cash to pay expenses. Most mills Indian cotton and yarn popularity in China, as many of have cut production and are operating at less than 50% the features of both resembled domestically produced of capacity after years of steadily expanding capacity in cotton. The usual premium of domestic Chinese cotton order to meet the expected increase in demand. yarn prices has always allowed for Indian yarns to be generally competitive. The current lack of divergence between Chinese domestic prices and international prices, the large unsold volume of domestic cotton, and the sharp downturn in the weaving and knitting sector has changed all previous dynamics. Moreover, the domestic market has about 480,000 tons of unsold international cotton in bonded warehouses and another 100,000 tons of unsold imported cotton yarns. The loss of the Chinese cotton yarn import demand has resulted in non-vertical spinners focused on the export market reducing operating schedules and idling Regarding Indian spinners, it appears approximately capacity. The Northern India Textile Mill Association 3.0-3.2 million 480-lb. bales of cotton consumption are last week took out ads in the Indian Express newspaper tied to cotton yarn exports to China. 2019/2020 Chinese titled, “Spinning Industry Facing Crisis,” and cited the imports of Indian cotton yarn may drop to less than closure of approximately 1/3 of spinning capacity, mills 1.5 million bales of cotton use, reducing India’s overall incurring heavy cash losses, mills not in a position to cotton use by 1.5-1.7 million 480-lb. bales. This demand buy Indian cotton, and the failure of India to adapt may not return easily, and Indian mills will need to a market-focused cotton pricing policy. It called the 2 AUGUST 26, 2019 JERNIGANGLOBAL.COM ISSUE NO. 1033 crisis the most severe since 2010/2011. It went on to say that state and local taxes, high interest rates, high cost of raw material, and cheap imports of yarn and fabric from Bangladesh, Sir Lanka, and Indonesia also contributed to the problems facing spinners. Those concerns also seem to be creating more opportunities for man-made fibers to penetrate the Indian market. cotton is expected to be quite weak. Currently, a sizeable block of 2018/2019 crop Indian cotton remains unsold in bonded warehouses. The Indian industry needs to focus more on fully integrated operations and development of complete supply chains that can offer brands and retailers a turnkey solution. China’s success in textiles and apparel began with cheap labor. However, the industry’s rapid growth came from the very successful strategy of industrial clusters in which complete supply chains developed for one product group. There were clusters that dominated an industry such as sweaters. India needs a greater focus on this approach. The changes in the textile and apparel chain will offer fewer opportunities for yarn exports, and a greater emphasis is likely on turnkey suppliers. Target is one of the success stories in US retail, and it has moved to a heavy focus on India in apparel. But Indian suppliers will have to focus more on the complete supply chain, traceability, and transparency. Such retailers are requiring traceable supply chains and reliable quality. India also should avoid the temptation to switch more to man-made fiber, as this fiber is peaking, and the The weaker Chinese demand for imported cotton and environmental cost will soon overshadow other features. cotton yarn will also impact Indian export trade in Cotton apparel offers Indian exporters real opportunity, 2019/2020 as China has been an important market for especially in the US market, which is disengaging from cotton exports, as well. Demand for new crop Indian Chinese suppliers, a trend that will continue. CHINA’S APPAREL MARKET EXPERIENCES WEAKER DEMAND AND OVERCAPACITY hina’s domestic textile industry is in a major import tariff will hit Chinese apparel on September Cdownturn that started in October 2018 and 1st. The downturn was first linked to weaker domestic expanded and accelerated in March 2019. This demand, overcapacity as the demand slowed, and a downturn began long before the first expected US loss in confidence of forward orders. The weakness tied 3 AUGUST 26, 2019 JERNIGANGLOBAL.COM ISSUE NO. 1033 to companies switching orders out of China impacted 3.5% or more. Some forecasts had suggested demand the downturn after it had already gotten underway. would grow 5-8%. The textile and apparel sector China’s domestic apparel market had been forecast continued to expand, preparing to meet such growth by many to exceed that of the US in 2018. However, targets. A review of the annual reports and performance that did not happen. Li & Fung Research estimates that of China publicly traded apparel brands and retailers China’s apparel market in 2018 exceeded two trillion suggests that much of the growth in recent years in RMB for the first time, reaching 2,072.4 billion RMB, or apparel sales has come from the third- and fourth-tier approximately 300 billion USD, while the US market at cities. These are the areas that appear to have been the the same time reached a value estimated at 348 billion hardest hit since the trade war began, and the areas USD. The forecast had been for China’s apparel market where the greatest job losses have occurred.