Recently, against the background of the Federal Reserve’s continuous interest rate hikes, the trend of commodities has poured down like a waterfall, causing great damage to the industry. The commodity market can be described as “green, red, and thin.” During this round of decline, the domestic cotton spinning industry has suffered an impact. How big is this impact, and how will companies respond?
According to data from the National Bureau of Statistics, my country’s yarn production totaled 28.737 million tons from January to December 2021, a year-on-year increase of 8.4%. Among them, Shandong’s output reached 3.7547 million tons, ranking second in the country, second only to Fujian Province. In terms of pure cotton yarn output, Shandong ranks first in the country. After all, Fujian Province mainly produces pure fiber yarn or blended yarn. It can be said that Shandong has a strong representativeness in the field of pure cotton yarn in my country.
This time the author visited some textile industrial zones in Shandong and felt the impact on the front-line industries personally. I was quite shocked. This round of cotton market conditions will have a great impact on future industrial adjustments.
The sharp drop in cotton prices has led to high corporate inventories and product costs. This round of cotton price trends has two very obvious characteristics. First, the period of decline is very short; second, the magnitude of the decline is very large. The biggest impact is that on the one hand, companies purchase high-priced raw materials, and on the other hand, high-priced cotton yarn faces unsalable conditions. The price of cotton futures fell by about 8,000 yuan/ton in less than a month. The average price of cotton purchased by many companies was more than 20,000 yuan per ton. Due to the rapid price drop, traders hoarded cotton yarn and textile companies. The cotton yarn produced by the enterprises is flooding into the market, which further drags down the yarn and cotton prices. Some companies said that it will take at least two to three months to digest the high-priced raw materials and products in stock.
The intensity of raw material procurement has weakened and the pressure on the cotton market has increased. Faced with the falling market, the entire industry chain is destocking. Downstream customers just need to replenish their inventories, and raw material procurement is weak. According to survey data from the Cotton Logistics Branch of the China Cotton Association, the total cotton turnover inventory nationwide at the end of June was approximately 3.2161 million tons, a decrease of 433,200 tons from the previous month, a decrease of 11.87%, and higher than the 1.0171 million tons in the same period last year.
According to the latest purchase and sales data from the National Cotton Market Monitoring System, as of July 14, a total of 3.75 million tons of lint cotton had been sold across the country, a year-on-year decrease of 2.16 million tons, and a decrease of 1.591 million tons from the average of the past four years, of which Xinjiang sales were 3.252 million tons, a year-on-year decrease of 3.75 million tons. A decrease of 1.969 million tons, a decrease of 1.248 million tons compared with the average of the past four years. The above data shows that the year-on-year sales data lags behind significantly, and the supply pressure on the cotton market continues to increase.
The operating rate of enterprises has dropped, and yarn profits have retreated significantly. During the survey, almost all the companies visited had more or less lowered their operating rates because they failed to receive more orders and full production meant increased losses. The industrial inventory report of the National Cotton Market Monitoring System shows that in early July 2022, the operating rate of the sampled companies was 75.5%, a decrease of 4.1 percentage points month-on-month and a year-on-year decrease of 18.2 percentage points. According to the survey, large-scale textile enterprises are basically producing normally, with the operating rate remaining at about 70-80%. Small and medium-sized textile enterprises are relatively flexible in production, with the operating rate remaining at about 50%. It is not common for the entire industry to encounter such a low operating rate. . Some companies originally produced cotton yarn mainly for their own use. However, with the drop in cotton prices, the sales of cloth were very poor and the companies were forced to close down. As for when to resume production, it depends on downstream orders. Companies will not simply accumulate inventory without orders because the risk is too high. If the spinning yarn is sold after the cotton price falls, the product will be profitable. The problem is that the company’s raw material inventory price is very high, and it is still losing money based on the average inventory price. In order to reduce losses, the company has taken the initiative to reduce production capacity.
Foreign trade and domestic sales orders have decreased, and the pressure on enterprises has increased. In this round of cotton market trends, domestic and foreign cotton prices have declined in resonance, foreign trade and domestic sales orders have significantly decreased, downstream customers are very cautious in purchasing, and inventory removal is slow. Industrial inventory data from the National Cotton Market Monitoring System show that in early July, the yarn production and sales rate of the sampled companies was 88.2%, down 0.3 percentage points month-on-month and 5.2 percentage points year-on-year; yarn inventory was 35.2 days of sales, an increase of 2.2 days month-on-month. An increase of 22.3 days year-on-year. The production and sales rate of cloth was 83%, an increase of 0.3 percentage points month-on-month and a year-on-year decrease of 1.9 percentage points; the cloth inventory was 59.7 days of sales, an increase of 8.7 days month-on-month and an increase of 20.1 days year-on-year.
An export company said that the United States currently imposes a 7.5% punitive tariff on China. Calculated based on the value of 50,000-60,000 yuan per ton of cotton fabrics, this cost alone costs thousands of yuan more. Although foreign customers and domestic average The apportionment of this expenditure must also be significantly higher than the price of similar foreign products. As a result, orders will inevitably be transferred abroad. Foreign long-term orders and larger orders are rare this year. They are all short-term orders and small orders. However, companies do not have many options to deal with it. They can only strengthen cost control, improve management efficiency, and enhance product competitiveness.
The United States bans Xinjiang cotton, and the cotton market is in trouble. The current difficulties encountered by the cotton spinning industry chain are closely related to the U.S. policy banning the import of Xinjiang cotton. The reason why the impact on Xinjiang cotton was not great in the past few years is mainly because the implementation was not strict, giving companies a certain amount of room to operate. Now that the United States has tightened its policies, companies are very worried, because once textile and clothing products are found to contain Xinjiang cotton , will be destroyed. During the research, we learned that companies exporting to Europe and the United States have all used foreign cotton.
The above situation has been put on the table, and there are hidden worries behind it.��, European customers and Japanese customers have also begun to verbally notify companies to ban the use of Xinjiang cotton. Although there is no explicit ban and the implementation process is relatively loose, companies are worried that Europe and Japan will follow the footsteps of the United States and tighten the policy of banning Xinjiang cotton in the future, which will It has had a major impact on the domestic cotton market.
During the investigation, the company said that although it does not make foreign trade orders, it has gradually reduced the use of Xinjiang cotton. Because the cotton spinning industry chain is long, and the yarn is followed by weaving and clothing, it is unclear whether downstream customer orders are exported to the United States, Europe, etc. In the market, in order to avoid risks, some companies have gradually reduced the use of Xinjiang cotton.
Faced with multiple problems, how do companies respond? According to the actual situation of the survey, the company has roughly adopted four measures: First, speed up the research and development of new varieties to maintain its leading position in the industry. There is a company that focuses on the research and development of functional fiber products, and its product quality remains leading in the country. The U.S. ban on Xinjiang cotton has limited impact on the company. Most of the company’s products are chemical fibers, with cotton yarn accounting for a small proportion.
The second is to adjust the proportion of cotton and non-cotton fibers and focus on the domestic market. Of course, this requires higher technical reserves and employee capabilities of the company. Textile enterprises said that in principle, a textile machine can be switched and adjusted to produce cotton yarn or chemical fiber yarn, but the technical requirements for the enterprise are high. Since the physical properties of cotton and chemical fiber are different, they will also be obviously reflected on the spinning machine, so it must be based on Experience in adjusting relevant process parameter settings puts higher demands on workers who have been producing cotton yarn for many years.
The third is to adjust the production layout and build factories overseas to avoid Sino-US trade friction. The interviewed companies said that many years ago, companies valued the production cost advantages of Vietnam and other countries. For example, they did have advantages over domestic countries in terms of labor, electricity costs, taxes, etc. With the rapid development of the industry, the quality of Vietnamese textile workers has also been greatly improved. Since the start of the Sino-US trade war, companies have accelerated their overseas deployment, which has alleviated problems in raw materials and export markets. Currently, companies’ overseas production capacity accounts for about 50% of their total production capacity. As the impact of the U.S. ban on Xinjiang cotton continues to expand, companies like this will continue to increase.
The fourth is to improve the level of corporate risk management and control. The person in charge of an open-end spinning company said that what the company needs is long-term stable operation, rather than betting on the market outlook and earning profits from market fluctuations, which will have to be returned to the market sooner or later in the future. When the entire market improves, corporate profits are limited; when industrial development encounters a trough, companies can still operate normally. The key is to maintain low inventory of raw materials and products. Once the market changes drastically, the prices of raw materials and products will also change accordingly. Especially when the market goes down, inventories will depreciate significantly, and companies will inevitably suffer losses.
Despite the current difficulties, the tenacity of enterprise development is still there. In the face of market risks, enterprises are also taking measures to actively respond. The domestic cotton spinning industry will inevitably usher in a period of adjustment after experiencing a wave of rapid development. In the expected global economic recession Against the background of continuous strengthening, the in-depth adjustments faced by this round of industry deserve attention.
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