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Cotton prices fall spinning enterprises "two ends of the system" situation improved

Author: name From: name Modify: Jun. 17, 2020
Aug. 02, 2022
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Cotton prices have been falling steadily since May, falling more than 30 per cent so far, much more than cotton futures in the same period, to the relief of textile companies struggling with high raw material prices.

The reporter learned that since this year, textile enterprises "both ends are controlled". Recently as cotton prices fall, the enterprise management pressure has been reduced. Industry insiders are expected to follow the loose supply and demand pattern, spinning enterprises are expected to usher in improved business performance.

Textile companies have improved their profits

"Production margins have improved." A cotton spinning enterprise personage told reporters, but as a result of early accumulation of inventory more, at present with the sale of inventory, and did not enhance the intention of production load.

As of the close of July 27, the main contract of cotton futures was at 14,845 yuan/ton, down 32.6% from the high of 22035 yuan/ton on May 5, according to Wenhua Financial data. Cotton yarn futures main contract is down 26.5% from the high so far this year.

The reporter UNDERSTANDS from many personAGE INSIDE COURSE OF STUDY PLACE, ACCOMPANY COTTON PRICE falls, TEXTILE enterprise production profit APPEARS TO turn around. However, new orders are limited, textile enterprises are generally faced with inventory of finished goods depreciation, sales difficulties and other problems.

"Early cotton at 22,000 yuan/ton or so, the spinning enterprise large area loss." "Even with the current turnaround, textile companies are still facing losses in the actual process of operation," said a market participant.

"The industry is in a slow season, orders are scarce, inventory levels and operating rates are not ideal." Mei Er Ya futures cotton analyst Cao Yuan said to reporters.

Limited bargaining power to upstream and downstream

Cotton accounts for the largest proportion in the cost composition of cotton textiles. Take cotton yarn as an example, cotton accounts for about 70% of its production cost.

"For the spinning companies, the cost of cotton is basically determined by the purchase price of seed cotton in October every year." Wu Xinyang, a cotton textile researcher at CITIC Jiantou Futures, told the China Securities Journal, "The high costs facing textile companies are mainly caused by the irrational buying of seed cotton in October last year, even though there was already a decline in consumption downstream."

Take C32S pure cotton yarn as an example, Cao Yuan told the reporter to calculate a sum of account: "1 ton of yarn needs 1.1 tons of cotton, according to the current spot price, a ton of yarn raw material cost of 17,420 yuan, cotton yarn price 25420 yuan/ton." "Another important cost is labor expenditure. "Textile is a labor-intensive industry, and many enterprises are finding it difficult to recruit workers, leading to rising labor costs."

From the perspective of cotton textile industry chain, its upstream mainly concentrated in Xinjiang region, Xinjiang cotton accounted for almost 90% of the country's cotton output; Midstream enterprises mainly include cotton spinning, weaving, printing and dyeing, and most of them exist in the form of industrial clusters. Downstream mainly includes clothing manufacturing and terminal retail. In terms of the layout of midstream enterprises, "cotton spinning enterprises are concentrated in Shandong, Henan, Xinjiang and other places. Weaving enterprises are distributed in Shandong, Zhejiang, Jiangsu and other places. Printing and dyeing enterprises are mainly concentrated in Zhejiang, Jiangsu, Guangdong, Shandong and other places." Cao Yuan said.

"The midstream textile processing enterprises have limited bargaining power over the upper and lower reaches, and purchasing costs, business decisions, product quality and sales orders are all factors that affect the profits of midstream enterprises." Said the market participants.

"The sharp fall in cotton prices in recent months has put textile costs on a downward trend, but new orders are insufficient, finished goods inventories are high and business confidence remains subdued." Topix derivatives Institute senior agricultural analyst Fang Huiling told reporters.

Cotton price weakening good spinning enterprises

Processing and manufacturing in the middle reaches are squeezed by both ends of the industrial chain, and the low operating situation in the middle and lower reaches limits the transmission of high cotton prices. The weak pattern of cotton prices may continue, which brings certain space for the improvement of operating profits of textile enterprises.

Fang Huiling said that the current downstream orders of textile enterprises are still dominated by short orders, and the follow-up needs to pay close attention to the situation of autumn and winter orders at home and abroad from July to September. "There is a huge backlog of products in the cotton spinning supply chain and not enough new orders. At present, there are about two months to go before the new cotton harvest is on the market. If there is no substantial improvement in downstream consumption, the overall weak pattern of cotton spinning industry may continue."

"This year there are more than 2 million tons of domestic cotton unsold, the New Year cotton output is expected to increase year-on-year. In the lack of power in cotton consumption, cotton prices at high and other factors under the comprehensive impact, is expected to continue the weak cotton market situation." Cao Yuan said.

"The competition in the textile industry is fierce. Due to the separation of production and consumption in time, space and main body, it is difficult to achieve a perfect match between capacity investment and final demand. Inventories in all links of the industrial chain may further accumulate, which will further restrain the rebound of cotton price." Wu Xinyang said.

Source: China Securities Journal

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