Inefficiency and Atrophy In China’s Spinning Sector Provide Opportunities For Others

Sunday, January 13, 2013

The International Cotton Advisory Committee (ICAC) asked me late last year to write an article on the situation in China's yarn industry. I was a contributor to their publication Cotton: Review of the World Situationa report that I highly recommend for textile executives everywhere, as it contains insights from industry analysts from around the world, along with valuable market statistics. It costs just US$40 and may be purchased at the ICAC website. My article is republished here with their permission.
  

Meet My Friend In The Business

While in Shanghai for one of our Kingpins denim shows recently, I met with a friend of mine to discuss the current state of the Chinese textile industry. Although he was generally positive about the overall textile industry in China, our conversation turned to the spinning sector -- which he held in low regard. He explained to me that labor was the largest single cost for China's spinning sector today. I found that interesting, but puzzling. Although there have been numerous press reports about rising costs in China, I thought that the cost of cotton had the highest impact on the cost of Chinese yarn. My friend corrected me: "The price of cotton or polyester is important, but the cost of labor is even more essential to the final cost of Chinese yarn. In ten years, the average worker in a Chinese textile mill has seen his salary go up from 250 RMB per month to more than 2,500 RMB per month, but what makes this even worse for spinners is that they employ way too many people. Their efficiency is very bad."

As I reflected upon my friend's observations, I began to understand his point. There may have been a ten-fold increase in the cost of labor, but when I considered the industry's penchant for over-employment and over-capacity, my friend's observation became prescient. Government policies play a role as full employment continues to be a key goal of Chinese industrial planners. In fact, the more I thought about it, the more it made sense to me. I have visited dozens of spinners throughout China over the years and found the same things in common from mill to mill -- many spinning frames were idle and lots of workers were standing around with little to do. I remember one mill in particular, where the workers moved the same boxes in fork trucks back and forth from one side of the mill to the other and back again for hours every day. So much for efficient employment! I guess it is fair to say that Chinese spinners are at a disadvantage to mills elsewhere, but there is more to the story.

The Textile World Goes The Way Of China

To discuss the global textile market is to discuss China’s textile industry. China’s industry is such a large portion of the global market that, plainly put, the global industry goes the way of China. If China’s textile industry struggles, so will global textiles and all suppliers into that industrial chain, but this will also provide opportunities and challenges for producers elsewhere. Chinese companies understand competitive pressures better than any other company; however, government employment policy saddles spinners with excessive overhead costs and, to make matters even worse, cotton policy skews domestic production, keeps domestic prices artificially high, and limits the amount of cotton that may be imported at any one time. In doing so, Chinese government policy positions the fortunes of cotton farmers opposite those of spinners. What results is an inefficient, barely profitable industry (Figure 1).


Figure 1.


The local spinning sector is large, but its problems make it vulnerable to more nimble producers. To place China’s industry in perspective, it is the dominant producer of yarn in the world today. Whether measured in terms of short or long staple capacity, or in terms of open-end rotors, the Chinese industry accounts for at least a quarter of global capacity. A vestige of state-run missteps, China’s yarn sector has struggled to upgrade the quality of its production and to price its products more competitively. Over-capacity continues to plague the sector, yet despite its size the industry continues to lose ground to competing industries in countries such as India and Pakistan, which remain far more profitable (Table 1). 

Table 1: Global Spinning Capacity in 2010, China vs. World (Millions)


Short
Long
OE

Country
Staple
Staple
Rotors


Million Spindles
Million Spindles
Million Rotors


China
120.1
3.6
2.3






World
243.6
14.7
7.6






% China
!B10 Is Not In Table
!C10 Is Not In Table
!D10 Is Not In Table






Source: International Textile Manufacturers Federation (ITMF)


The last global downturn underscored the weaknesses of the Chinese spinning industry. Moreover, the great challenge for yarn producers in China and around the world remains sinister: What happens if the global economy falls back into recession? Would Chinese spinners be able to compete with mills in Vietnam, Indonesia, Bangladesh, India, Pakistan, or elsewhere, if they were forced to slash prices just to keep pace in a declining global market?

Other factors impact the efficiency and profitability of the sector -- most importantly, Chinese government policy regarding the importation of raw cotton, which not only artificially hikes the price of domestically produced cotton, but limits the amount of cotton that can be imported at any one time and skews the trade in favor of imported yarn from other countries as Chinese weaving and knitting mills look elsewhere for more competitive yarn (Table 2).


Table 2. Imports of Cotton Yarn by China

Marketing year
Import (million metric ton)
00/01
0.05
01/02
0.12
02/03
0.72
03/04
1.99
04/05
1.66
05/06
4.11
06/07
2.28
07/08
2.44
08/09
1.45
09/10
2.50
10/11
2.58
11/12
5.44
12/13
2.97
13/14
1.74

SourceNational Cotton Market Monitoring System (NCMMS)


As a result, domestic yarn spinners are squeezed on price from both above and below in the supply chain. Spinners are forced to purchase high priced domestic cotton while restricted from importing cheaper foreign cotton to help offset their cost (Figure 2). Concurrently, Chinese weavers and knitters freely import low cost yarn from elsewhere. Ironically, this squeeze has propelled some spinners to move out of China entirely for places such as Vietnam, Bangladesh and Cambodia where labor costs are lower, and the Chinese market is easily serviced. China does not export much yarn these days, but it is exporting its yarn industry at a steady pace.


Figure 2: Domestically Produced Cotton Yarn vs. Domestically Grown Cotton In China


An additional factor impacts the yarn business in China: over-capacity of man-made fibers. According to Chemease, a chemical and fiber reporting service in China, polyester staple capacity utilization (that is, the relationship between actual output of fiber and maximum production with total installed equipment operating if fully used) in China dropped to just 70 percent in November 2012. The fiber industry typically considers 80 percent utilization to be break-even, so the current utilization rates, which fell steadily in 2012, indicate that the industry as a whole is not profitable. In turn, lower utilization rates translate into lower prices helping the cost structure for many Chinese spinners, but locks out higher quality yarns made with cotton, which increasingly have to be imported by knitting and weaving mills. Figure 3 depicts the price scenario in China for cotton, polyester and rayon.



Figure 3: Prices for Cotton, Viscose and Polyester Staple Fiber (PSF) in China

Needless to say, it is challenging to be a textile mill in China today. The combination of a weak domestic yarn sector, coupled with the inability to import cheaper cotton from around the world at will, has placed many Chinese weaving and knitting mills at a competitive disadvantage in global markets.  Additionally, Chinese textile companies are faced with downward price pressures from local garment companies, which is the result of weaker demand for Chinese apparel overseas and higher labor costs at home (Figure 4).




Figure 4: Production Prices for Weaving & Knitting Mills vs. Garments Produced in China


Due to these various factors, Chinese knitters and weavers have little choice but to import greater and greater quantities of cotton yarn from Pakistan, India and elsewhere. There are no restrictions on the importation of cotton yarn, import tariffs are relatively low, and imported cotton yarn tends to have a better balance between price and quality than much of the domestically produced yarn. However, here is the rub for Chinese spinners: as more yarn is imported, sales of domestically produced yarns fall and margins are squeezed even more. The last recession reduced some inefficient capacity, but some still exists.

So, this is the story of an enormous, inefficient industry that is handicapped by government policies and is forced to improvise in order to survive. Nevertheless, despite all of these challenges, the industry continues to draw substantial foreign direct investment as shown in Table 3. Foreign direct investment helps to feed this undisciplined beast, which in future years may prove to be unsustainable.

Table 3: Foreign Direct Investment in China’s Yarn, Knitting and Weaving Industries (billion US$)

Year
FDI (billion USD)
2001
40.7
2002
46.9
2003
52.7
2004
53.5
2005
60.6
2006
60.3
2007
69.5
2008
82.7
2009
92.4
2010
90.0
2011
105.7

SourceChina Ministry of Commerce

India: The Hand That Feeds China

Many of China’s weavers and knitters rely upon the Indian spinning sector, an industry plagued by its own problems and inefficiencies. India’s spinning industry specializes in finer yarn production. Other spinners in countries such as Pakistan and Bangladesh are more proficient in the production of coarse count yarns. Even so, the Indian spinning industry has become large, yet its growth has largely occurred due to an expanding export business, particularly with China (Tables 4 and 5). Many Indian spinners are nearly as inefficient as China’s, but they do not have the handicaps with which Chinese spinners operate. Of course, the Indian government’s efforts to restrain yarn exports from time to time disrupt the trade, but those actions have always been temporary; in China, government actions are self-perpetuating. Nonetheless, India’s spinning sector has expanded at a time when the rest of its textile industry has struggled. The number of installed spindles has grown by nearly 30 percent since 2005 while the number of looms has declined by a similar percentage (Table 6).


Table 4. Exports of Yarns from India to the World (US $ Million)


2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Cotton Yarn Incl. Sewing Thread
      1,208
      1,282
      1,223
      1,493
      1,420
      1,908
      1,503
      1,616
      2,701
      3,008
Man-Made Filament Yarn
        201
        206
        261
        309
        327
        550
        422
        466
        865
      1,175
100% Non-Cotton Yarn  incl. Sewing Thread
        291
        340
        358
        372
        421
        573
        459
        550
        763
        835
Other fibres yarn
          76
          91
        122
        107
        120
        117
        103
          78
        190
        182
 Total Yarn
    1,776
    1,919
    1,965
    2,281
    2,287
    3,149
    2,487
    2,710
    4,519
    5,201

Table 5. Exports of Yarns from India to China (US $ Million)



2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Cotton Yarn
          57
          63
          58
          93
          88
          71
          91
        141
        317
        560
MM fibres/filaments
            6
          20
          22
          11
          22
          21
          20
          23
          48
          46
Source: DGCI&S, Kolkata

Table 6: India’s Cotton and Man-Made Fiber Textile Industry

Number of Spinning Mills
Number of Spindles
Number of Rotors
Number of Weaving Mills
Number of Looms
Fiscal Year

(Millions)
(Thousands)

(Thousands)






2005-06
2,743
37.51
520
414
92
2006-07
2,844
39.50
601
404
88
2007-08
2,816
39.07
621
355
71
2008-09
2,900
41.34
659
361
71
2009-10
2,933
42.04
675
363
71
2010-11
3,090
47.57
749
357
66
2011-12
3,097
48.25
771
369
66
Sep. 2012-13
3,105
48.70
782
372
66
Sep. 2011-12
3,087
47.89
760
357
66






Change from 05-06 to 11-12
9.62%
22.57%
22.38%
0.56%
-7.04%






Source: Confederation of Indian Textile Industries (CITI)

A New World Beckons: The Future of Spinning in China and Elsewhere

Chinese spinners do not control their own destiny. Although China’s spinning industry is the largest single producer of yarn in the world, it has to contend with government interference, high domestic cotton costs, limited cotton import options and customers willing to change suppliers with little notice. All of these factors combine to result in a weak link in an otherwise robust Chinese textile supply chain. Increasingly, domestic customers of Chinese yarn are turning away to foreign suppliers to meet their needs. This trend will only continue and will result in diffusion of spinning away from China. Concurrently, many Chinese textile firms have made investments in countries such as Vietnam and Cambodia. Free trade agreements between ASEAN counties and China have also made it easier for Chinese companies to relocate their production to other countries.

According to ICAC statistics published in the most recent World Textile Demand (October 2012), greater China (including the integrated industries of Hong Kong and Taiwan) produced about seven million metric tons of cotton yarn in 2000; in 2010 production peaked at nearly 21 million metric tons, only to decline to 19.8 million metric tons in 2011. In turn, ICAC forecasts production to top 21 million metric tons in 2013, which I believe may be overly optimistic for one very simple reason: imports.

The ICAC records that greater China imported just under 900 million metric tons of cotton yarn in 2000, but by 2009 (the first year of complete data are available) imports tallied nearly 1.3 million metric tons, a growth of over 40 percent! Based on these numbers, imported cotton yarn is about equivalent to 10 percent of domestic consumption. With this 40 percent growth rate, I wonder if domestic spinners, with all of their problems, will be able to compete. I doubt it, at least not in the long run.

I have discussed the changing market for cotton yarn in the region. India has built an industry around servicing the export market, particularly China. Bangladesh, Vietnam, and Pakistan have also sliced out sizeable roles in the market. But there are other players entering the market that as recently as five years ago could never have carved out a segment in the greater Chinese market, let alone in the world market. Lo and behold: in 2008, the United States exported $577 million worth of cotton yarn to greater China; in 2012, the annualized figure stands at $877 million, an increase of 52 percent! The United States has enjoyed a fairly robust export business in the Caribbean and Mexico, but in the latest US Export Market Report (published by the Office of Textiles and Apparel), Mainland China was the second largest destination for U.S. cotton yarn exports after Honduras.

How times are changing. A new world beckons.

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