Rising cotton yarn prices pose to be a problem for Indian hosiery companies and domestic demand

One of the most prominent signs of an economy in distress is the fact that almost all industries face the crippling hassle one after the other. While we heard the news of food and retail inflation in the week before last one and the falling gold prices in the last, this time we are witnessing high yarn prices making headlines. We never said this macro economy thing is simple, did we? A similar event happened a decade ago, when the country witnessed steeply rising yarn prices, most of which was credited to high cotton prices that constitute about 65-70 per cent of the yarn’s cost. This time, however, the story is a little different. But before we talk about this story, let’s understand the math that goes behind it.

Cotton, while being a major contributor to the cost of yarn, does not solely play a part in it. Power supply and thus power costs mark their place as the second most important element of yarn cost, followed closely by the labour costs. Even though most of the times the reason for high yarn prices is the rising prices of cotton, especially due to its export demand and usually high international prices that are followed very closely. However, this time the rise in yarn prices is not because of the rise in cotton prices. But, let me clarify, it is not like the cotton prices did not rise at all. They saw a 30 per cent increase in the prices because of the price movement closely related to the international demand and thus prices. However, concerning is the fact that 30 per cent increase in prices has led to 60 per cent increase in yarn prices, a number not really evidenced by the data from the past nor by the math that goes behind it.

For the current period, the Cotton Corporation of India (CCI) has reduced cotton prices by Rs 1,500 per candy, but this has not led to reduction in yarn prices. The main reason for high yarn prices is the fact that the export demand right now is significantly high and well, it would be fair to say spinning meals are taking advantage of it, more than they should. While the raw material prices that contribute to the cost of yarn have risen by about 30 per cent, the cost of yarn has gone up by as much as 60 per cent, almost double of what the reality has been, pointing to the fact the mill owners are enjoying the current demand supply gap. This has brought in significant troubles for the Hosiery industry, which has already been in distress owing to the pandemic. As a result, the government urged the industry to not raise prices for it is not in the economy’s interests at the point. However, Vinod Gupta, managing director of Dollar Industries, said “there is a likelihood of spinning mills increasing prices for April by Rs 10 per kg despite the government urging the industry not to raise prices. Dollar Industries has already hiked prices by around 17% in the past few months and will be hiking prices by another 3-4% from Thursday.”

It is clear from the above data that the spinning mills are focusing on the export market at the point and are clearly not fulfilling domestic demand. This roots from the fact that the Hosiery industry, that relies on supply of yarn for manufacturing are facing issues because of the high yarn prices and some significant manufacturers have had to raise their prices by as much as 10 per cent, with demand getting hampered as its aftermath. B Agarwala, Managing Director (MD) of Rupa & Company, and president of Kolkata-based Federation of Hosiery Manufacturers Association, said “There has been a 50% rise in yarn prices and 30% rise in cotton prices. The rise in yarn prices is more than cotton. Therefore, until now, there has been a 10% increase in prices of finished goods. The rise was originally meant to be over 17%, but has not been increased to this extent due to market resistance. The association has written to the government seeking a cap on the price rise because if this continues, small players will not survive”.

With the government seeking in ways to support the medium and small enterprises (MSMEs), sustenance of small and medium scale manufacturers would play a significant role in contributing to the goal. This points at the fact that if the increasing yarn prices lead to exit of the small players, the industry would have to undertake huge losses when the demand gets back, looking at the current state of the Indian economy. Last week, the Apparel Export Promotion Council sought the intervention of the government to impose restrictions on exports of cotton yarn from India in order to curb prices and increase supply to domestic manufacturers of the country. Gupta said only after that meeting with the minister of textiles, cotton prices got reduced by Rs 1,500 per candy, but that doesn’t seem to have translated into reduction in yarn prices. Meanwhile, Ashwin Chandran, chairman, Southern India Mills Association, has urged the spinning sector to retain the price for April and avoid any price increase to enable the downstream sectors to meet their commitments. Again, as long as the government doesn’t directly step in to place in a price cap over the yarn prices and ensures that mill owners coordinate with the industry to aid domestic demand as opposed to the focus on export market, the sustenance of the industry would be a tough ne which we would not want at such a critical stage of the economy. Basically, at the end of the day, everything comes down to how morally and ethically correct are the present market conditions, and what regulations and steps is the government taking to ensure the same.