India Ratings and Research (Ind-Ra) believes the Withhold Release Order on cotton and apparel imports from specific producers in Xinjiang Uygur Autonomous Region (XUAR) might escalate global trade tensions and thus have negative implications on the Indian textile sector in the short run. However, it could be beneficial in the medium term.
There is a risk of further sanctions by the US government on curbing imports of the products originating from or having linkages with XUAR. Furthermore, importers in the US are likely to be concerned about any economic, legal or reputational concerns on any of their supply chains linked to XUAR. The US imported US$ 7.35 billion of apparel products from China during January-July 2020 while China exported around 20% of its overall apparel exports to the US in 1QFY21. Furthermore, China depends on the US for raw cotton. XUAR produces lion’s share of the China’s annual cotton production at 85% (Cotton Year (CY) 2020: 27.3 million bales; CY2019: 27.75 million bales) and under 20% of world’s total. Also, 70% of total cotton spun into yarn produced in China is originated from XUAR.
Likely retaliation from China
This action may have spooked China and it could resort to retaliatory measures. Cotton procurement from the US could be delayed by Chinese mills, leading to favourable supplies from Brazil and India, both of which are likely to have high inventories. While demand from the US could impact overall cotton demanded by China, the value-addition could gradually move out of China to other geographies. However, this is more of a medium term phenomenon.
Medium-term positive for India
Indian yarn players have high export dependence on China (FY16-FY19: around 30%), which reduced to around 20% for the three months ended June 2020 on account of a lower demand and growing competition from Vietnam and Pakistan. The trade war extension and labour related issues could lead to the creation of additional yarn and cotton demand from neighbouring countries to the tune of 0.5 million tonnes and 8-10 million bales (480lb). The agency believes that countries such as Pakistan and Brazil have a pole position compared to India due to their preferential status. However, India can get a share of the pie, given the low-cost raw material availability and established presence of Indian textile players in the USA. The agency views the shift in demand could lead to a healthy recovery in credit metrics and ease of liquidity stress for exporters in FY21.
Given Vietnam’s textile industry has strong dependency on China, it is equally vulnerable to have supply chain linkages with the tainted XUAR region. Vietnam may cater additional cotton yarn production of around 0.4 million tonnes to meet Chinese demand. However, incremental cotton/ yarn sourcing could be from India, given the logistics and cost advantage. During CY2020, India exported 8% of its total cotton produce to Vietnam.
Any impact on the Chinese textile industry would flow down to Vietnam directly, impacting capacity utilisations. Vietnam had a total yarn production capacity of 2.5 million tonnes as of 2019, of which about 45% is controlled by China and Taiwan. Vietnam imports 55% of its cotton requirements (CYE20: 5.9 million bales) from the US, exports 80%-85% of its total cotton yarn production (2019: 1.1 million tonnes) to China. Also, it buys 55% of its synthetic yarn requirement (2019: 1.1million tonnes) from China for its weaving and knitting industry, which leads to domicile linkages with China.
China a net importer of cotton
China’s annual cotton consumption exceeds its domestic production and hence it depends on imports from countries such as the US, Brazil, Australia and India (total Imports: CY20: 7.1 million bales; CY19: 9.6 million bales). While US and Brazil share 60%-65% of the cotton imported by China, the share of India is below 10%. The stock-to-use ratio (closing stock/production) has been around 1.3x over CY2018-CY2020 and is expected to remain the same for CY21.
China yarn imports
China imports cotton yarn majorly from Vietnam (30%-35%) and India (7%-10%) of its total import of around 2 million MT annually. The agency estimates the annual cotton yarn requirement for China at around 4.5-5 million tonnes for CY2201 with usage of cotton to man-made around 35:65 in fabrics and apparels.
Global textile and apparel trade situation
China’s total apparel exports declined 31% yoy in 1QFY21, compared to a significantly higher decline for economies such as Bangladesh and India. India’s cotton yarn exports declined 28% yoy in FY20 to Rs 196 billion on account of a 53% yoy decline in demand from China due to the ongoing US-China trade war. While India’s exports to China increased 1.8x yoy during June 2020, due to the pent-up demand and restocking by Chinese players, the overall exports reduced 29% yoy during 1QFY21. India’s yarn exports over the past three years have been around 1.2 million tonnes; it reduced drastically in FY20 to less than 1 million tonnes over the geo-political tensions and higher competition from ASEAN countries.
Trade market share tug-of-war
While Vietnam has risen significantly to the occasion by increasing the US apparel market share to 20.1% in 1QFY21 (1QFY20: 16%) on account of China’s loss of market share by 800bp yoy, India’s market share dropped by 400bp yoy due to lower shipments and tighter lockdowns in the country. While China’s woven apparel exports to Vietnam increased during 4QFY20-1QFY21 by around 61%, veiled shipments have helped it to avoid the additional tariffs imposed by the US in the past year. Shipments from Bangladesh to the US also recovered in 2QFY21 with a jump in the overall market share by 200bps yoy. The low-cost country has made decisive gains in terms of market share post pandemic impact.
Additionally, severing of ties by global retail brands such as H&M, Lacoste with China on account of labour issues along with the ongoing US-China trade war has benefitted Indian readymade garments exporters in form of additional orders. The agency believes that the vacuum space created would be positive for Indian RMG exporters and help them to tide the impact of pandemic for FY21. Furthermore, the home textile segment has reported increased inquiries from the US for sourcing diversification.