China domestic yarn price unfavorable to Indian and Pakistani suppliers

From March 6th to 8th, Shanghai Yarn Expo was held as scheduled at the Shanghai National Exhibition and Convention Center. Although the yarn exhibition was slightly earlier than in previous years, the popularity surpassed the autumn/winter exhibition in 2023. The venue was crowded with people, and many companies from the entire industry chain gathered to discuss and consult. Companies such as Shanghai DiW, Wuxi Yimian Textile, and Sateri, once again occupied the spotlight, attracting numerous potential customers for discussions. The size of the overseas exhibition area was reduced compared to the previous autumn/winter exhibition, mainly featuring the Indian and Pakistani exhibition teams. Old faces like India's Excel, Amar, Glossy, and Pakistan's Fazal, Global Tex were prominent, while few local Vietnamese yarn mills participated, with Phu Group being the main representative. Indonesian companies Indorama and Duniatex also garnered some attention.

Imported yarn prices and domestic prices are showing divergent trends

After the Chinese New Year holiday, prices of US cotton, Indian cotton, and Pakistani cotton all rose simultaneously, resulting in a staggered increase in foreign yarn offers. During the exhibition, most overseas yarn prices remained strong. Although there was room for negotiation in actual transactions, with discounts of 5-10 cents/lb, it is still far from the intended range in the Chinese market. As shown in the figure below, based on preliminary feedback from on-site exhibitors, the ordering costs of most specifications of imported cotton yarn are significantly lower than the spot selling prices, with some specifications showing a difference of over 2,000yuan/mt.

In early March, the Cotlook A cotton price briefly surpassed the domestic 3128B cotton price, and the price difference between the two fluctuated around 500yuan/mt of raw cotton. The divergence in domestic and foreign cotton prices intensified the contradiction in the yarn stage, making it a current challenge for the cotton yarn trade to reconcile the split between imported yarn international and domestic prices. After the Lantern Festival, the overall cotton yarn market in China has seen transactions below expectations, with domestic yarn prices showing signs of returning to pre-holiday levels. Imported cotton yarn has also shown a trend of rising and then falling back. As a result, the current round of cost-driven price increases in imported yarn has not been gradually absorbed. Instead, it adds a sense of peril to the market.

Challenges for profitability of overseas yarn mills

A sales manager from an Indian yarn mill admitted on-site, "We came to the exhibition prepared for the possibility of not making any deals. The current cotton yarn prices are too high, and even if we quote, it doesn't make much sense." Indeed, the high cotton prices have hurt overseas yarn mills. According to feedback from Vietnam's Phu Group, conventional cotton yarn 32s is not only unprofitable but also likely to cause significant losses to the enterprise. Currently, the group continues to produce fully cotton ring-spun yarn 30s for the European market and mainly supplies CVC and TC yarn to the Chinese market. Prolonged losses since 2023 have prompted more Vietnamese yarn mills to accelerate the transition to blended yarn and differentiation, attracting domestic trading companies to expand exports of chemical fiber raw materials to overseas textile enterprises.

After the sharp rise in Pakistani cotton prices, Pakistani spinners also faced the dilemma of rising costs. Fortunately, in the second to third quarters, most spinners have accumulated substantial profits due to the arrival of Pakistani cotton. Exhibitors reported that top customers in the Chinese market had placed orders for thousands of tons before the price hike. These orders are expected to support the production of spinners in the short term. However, they feel helpless in facilitating recent deals. The cotton yarn export offers from Indian mills are mostly around the break-even line for the enterprise's production cost, with some profit opportunities with tax refunds. However, the reduction in orders from the Chinese market is forcing some mills to reduce operating rates and alleviate the accumulation of finished products. Many exhibitors said, "We are still waiting for transaction opportunities, hoping that cotton prices in the Chinese market will rise again so that our cotton yarn prices may be accepted."

Advantages of China domestic cotton yarn apparent

However, the industry's feedback seems to go against expectations. The start of work and order acceptance after the Chinese New Year for downstream weaving mills in locations like Foshan, Lanxi, and Changzhou is not ideal. Pushing high-priced imported cotton yarn into the market will undoubtedly encounter resistance, and the game between "quantity" and "price" will likely continue throughout the peak demand season in Mar and Apr 2024. From the perspective of cotton yarn traders, most low-cost materials have been pre-sold before the Chinese New Year, and maximizing the benefits of materials on hand under the relatively low pressure of repayment has become the primary task. Senior traders on-site also revealed, "If foreign cotton prices do not come down in the short term, we cannot sit idly by. In terms of quality, Xinjiang cotton yarn is unbeatable, and the future cotton yarn trade needs both domestic and imported products to coexist." Many industry insiders share the same mentality, collecting business information, searching for cooperation opportunities with domestic yarn mills in the later period, and if domestic and foreign cotton prices continue to reverse, there is also a chance for the window of opportunity for domestic cotton yarn exports to reopen.

For imported yarn, perhaps the biggest threat has already emerged. On the other side of the exhibition, Shanghai DiW announced a high-profile signing of a 6-billion equipment procurement contract with Swiss RIETER, preparing to further leverage its cost advantages, accelerate capacity expansion, and directly reduce the price of compact-spun yarn 32s to around 23,000yuan/mt. A price difference of over a thousand yuan in cotton yarn will undoubtedly impact the choices and preferences of downstream customers. If the short-term demand for imported yarn is limited to export orders with traceability requirement, its import demand will also be greatly affected. The boundaries between overseas and domestic yarn in the race are gradually becoming clear, and a certain degree of differentiated operation may be inevitable.