The warp and the weave

Reshma Krishnan

TWO forces affect the fortunes of the cotton yarn, an intermediary product: Supply of raw cotton and the demand from fabric manufacturers worldwide.

Cotton yarn manufacturers can never really call the shots because they require working capital and, therefore, need to sell at the prices dictated by fabric manufacturers. They cannot dictate prices to the farmers as they have to pay market rates.

The cost structure of cotton yarn is highly unattractive to the manufacturer. About 55 per cent is accounted for by raw cotton and the rest by power, wages and interest costs. Since raw cotton comprises a high variable cost component, the effects of a small increase in its cost has a large impact on profit. Traditionally a high variable cost component industry, it has the advantage of reaching the break-even point faster as the fixed cost component is small. But this works both ways. If a small decline in the variable improves profits greatly, a small increase affects margins significantly.

The increase in raw cotton prices is perhaps the biggest problem facing the cotton yarn industry today. Take for instance the J-34 variety. There was a 21.70 per cent increase in the price of this cotton to Rs 49.28 per kg in November 2000 from a year earlier. Cotton yarn prices have, on the other hand, risen only by 7 per cent to Rs 109.79 per kg, reflecting a massive squeeze on margins for the coming financial year.

As price is a function of supply, the reason our prices are so high is that our supplies are mediocre. In 1999-2000, production fell by almost 5.4 per cent to 156 lakh bales (of 170 kgs each). Of the quantity produced, only 96 per cent is used, 4 per cent going waste (partly lost in the ginning process, which is another issue in itself).

Cotton imports have also been on the rise -- 129 lakh bales. The land under cotton cultivation has fallen from 92.87 lakh hectares in 1998-99 to 86.46 hectares in 1999-2000. This is a far cry from 1996-97, when cotton production was in excess and actually exported. The yield is another problem. A hectare yields merely 301 kg compared to 1,016 kg in China and 1,633 kg in Israel.

Another aspect is the two markets it caters to. There is the domestic market, with the produce going to the powerloom, handlooms and textile mills. The powerlooms claim 55.53 per cent of this.

The domestic market is fragmented and policies that mandate that a certain percentage should be produced as hank cone and offered to the handloom industry, where there is no market, affects manufacturers already constrained by the operating conditions.

The biggest threat facing the powerlooms is perhaps the WTO regime to come into force 2005. Technologically, the powerlooms are not on a par with the rest of the world. Post-0005, cheaper fabrics may be dumped in the country affecting the powerlooms, and threatening an important market for the spinning sector.

Also, the market is stagnating as the industry seems to have the reached the saturation point. Sales and realisations over the last 9-10 years have followed a pattern of sorts. There was a similar dip in 1998-99, and earlier in 1994-95. From then on, there was a steady improvement in production till 1998-99. The main area for concern is whether consumption patterns are keeping up with production. In the last eight years, production has increased at an average of 5.6 per cent per annum, while the consumption has risen only by 3.58 per cent. The annual rate of increase has also been declining, indicating a saturation of the market. On the one hand, an industry like cotton yarn requires large volumes, as margins are small. And, on the other, there is not enough demand to justify those volumes.