ItΆs undeniable: The cotton market has changed dramatically. Cotton plummeted 1574 points between May 1 and May 24, 2012. Apart from the futures, physical price of major cotton growths also fell dramatically, by an average of 3000 points during that same period. For Indonesia -- which has yet to recover from the challenges of 2010/11 seasons – this could prove to be a fatal blow for the entire spinning industry.
Spinning mills in Indonesia are under tremendous pressure as retailers have been importing finished fabrics from other textile-producing countries rather than buying locally. The reason is simple: It costs less. The proof is in the estimated import data for finished fabric and textiles, which showed a 20% increase this year (the second consecutive year with double- growth in digit imports).
March, April and May are usually the busiest months for spinning mills and textile-related industries, as this is the peak production period for the biggest festive season in Indonesia, Idul Fitri (Lebaran), which will fall on August 19 this year. Unfortunately, the amount of inquiries mills have received during those months is much less than expected due to high levels of imported finished goods.
The biggest issue is cost. One mill source told us that “The problem was not a lack of inquiries, but rather, the prices that we have to sell our yarns at … It kills our profitability.”
Ironically, technology – the cure for so many business ills – is perhaps the biggest culprit. Mills say the availability of financial apps for tablets and smart phones have trained buyers to expect “instant discounts” when futures prices drop. In other words, once the future price declines, buyers demand that spinning mills reduce their yarn prices proportionately. However, spinning mills make their raw materials purchases about one month in advance due to transit times. In other words, price updates might be reported in real time, but production costs are not. While spinning mills have tried to explain this situation, buyers still demand a lower price on the spot or will simply wait until prices drop before making their purchases.
Several mill associates have implied that if bad market conditions continue and there are further declines in futures, spinners might be forced to renegotiate their contracts or, even worse, default on them. The price pressure for cotton yarn, combined with lower demand and declining prices for physical cotton, is a major factor that will determine the survival of spinning mills in Indonesia.
On the bright side, cotton finally reclaimed some ground from man-made fibers (polyester and rayon), which are also experiencing a decline in demand. We at Spinwell believes that Indonesian spinning and textile industry will weather the storm – just as it did in 2008 and 2010 – but it will take a considerable amount of time for the industry to be healthy again.
