Indian mills catering to the Chinese market likely to get hit with china taking decision to increase spending on farm subsidies by 10 percent to boost yarn production as cotton will be available to Chinese spinning mills at a cheaper rate.

China is the largest importer of cotton yarn in the international market. It is estimated in the recent past, cotton yarn export to China accounted for half of India’s overall exports of the commodity. In fact, in the past three years, consistent growth has been recorded in cotton yarn export to China, as so far, mills in that country have secured cotton at higher prices.

According to S P Oswal, chairman of Oswal Group, there could be a fall of about 20 percent in yarn export to China this year. The demand for cotton yarn from China might come at razor- thin margins, which many Indian companies might find unviable. Those who cannot afford to export at such prices might not be able to sustain. Mills in India have sufficient capacities but are underutilised due to power shortages.

In anticipation of high demand from China, Indian millers ramped up capacities in the past three years and, consequently, dwindling demand will hit their bottom lines, he adds. For 2014-15, cotton yarn exports are projected at 1,000 million kg, and this is expected to decline in 2015-16 if demand from China is low.

Hardyal Singh Cheema, managing director of Cheema Spintex, a major yarn exporter, is keeping his fingers crossed. Though a record cotton crop of 40 million bales (one bale=170 kg), compared with 37 million bales in 2013-14, could benefit the spinning sector, mills will record losses if demand from other countries declines. Now, Cheema is looking out for new destinations such as Vietnam, Cambodia and Latin America, though their volumes cannot match demand from the Chinese market.

The Confederation of Indian Textile Industry (CITI) recommends companies focus on the domestic market. D K Nair, secretary-general, said that it might be an uphill task, as despite a good cotton crop this year, opportunities will be few.

There is, however, a silver lining: The Centre has, in the revised technology upgrade scheme for the 12th five-year Plan, stressed revival of the fabric sector. As garment exports rise, the right strategy and attention to fabric manufacturing could help consolidate the entire value chain. India export about a third of their cotton and an equal proportion of cotton yarn. This could be used in the domestic sector to increase share of garment exports in the global market.

While analyst are of the view that though millers might see supplies exceeding demand in the short term, resulting in lower recoveries, emerging markets might present new opportunities in the long run as domestic demand for cotton has been increasing five-seven percent a year.