Rising cotton prices may not be sustainable

Disclaimer/Note: Please take serious note of the fact the views expressed here are merely speculative and based on the observations and understanding of the authors of this blog post, and should not be taken otherwise. Strictly, this should not be taken as an investment advice for people holding futures or options in cotton commodity trading. Textilestock.in will is not in the business of proving investment advice on trading of any financial instrument, and hence will not be liable for any implication whatsoever for actions following the views expressed in this blog post.)

The Economic Times, on 9th Feb, published the article “Cotton farmers smile amid global, local demand and price pick up”. Here are our views on how cotton prices will fair in the short to medium term on the commodity exchanges. We predict that in the short to medium term future, the cotton prices will fall due to various reasons.

The above mentioned article states that China is India’s biggest customer for cotton and China is also the largest garment exporter to USA. There is a growing demand for cotton from China, which is a direct result of the increase in demand of textile products in the US due to economic recovery from recession. As per our understanding, this is true and is surely a major reason for rise in cotton prices since the demand of cotton from Chinese exporters have risen.

We believe that the demand of textile products in the USA has recovered but this recovery might be unsustainable. A clue to this might be found in the February edition of The Economist in the article on America’s budget. In fact, this sudden surge in demand of textile products may be a result of long refrain from purchases of clothing and general textiles on part of the US consumer due to economic recession. Once this wave of sudden demand is over after the consumer has stocked their requirements, the spending on clothing and textiles will significantly reduce. Thus the demand for cotton will reduce and its price will fall.

Other factor which will contribute to falling cotton prices in future will be the fact that this year’s agricultural output of cotton fiber is expected to be good. This will indeed increase the supply for better quality raw cotton from India in the international as well as domestic market and that will pull the cotton prices down.

Once the demand for textile products falls, many companies will have to deal with inflated inventories. If your company happens to be dealing with such as issue, don’t forget to list you products on www.textilestock.in.

Innovation and moving up the value chain

Earlier, in this series of articles, we mentioned that we will be addressing the issue of reducing the adverse effect of macroeconomic factors such as rise of domestic inflation and currency appreciation against the dollar on diminishing profits. We addressed some remedies to counter strengthening rupee and rising domestic inflation in by suggesting some short to medium term plans.

Now let us take a close look at some of the long term strategic options. Before I start, I would like to quote Peter Drucker, the famous marketing guru, who said “Business has only two basic functions – innovation and marketing”. Although marketing have significantly evolved in the post-Drucker time, and technologies especially those relating to the World Wide Web are redefining the boundaries and scope of modern day marketing, the statement surely holds power.

As we pointed out in earlier articles, macroeconomic factors such as domestic inflation and currency appreciation become survival threatening concerns if businesses compete on price. This may be specifically true for Indian businesses since as compared to China, Indian manufacturing is certainly not the cheapest. Inflation and currency fluctuations are routine phenomenon in capitalistic and democratic economies such as India. The point here is that smart businesses should learn to build long term strategic safe guards so that every time currency appreciates or inflation rises, profits don’t have to take a beating.

In other words, if the core competency of a business is price, then any fluctuation that affects price, affects profits.

This is not to suggest that competing on price is a crime. But to successfully do so, companies need robust, well established and operationally efficient supply chains. Building such supply chains, such as one owned by world biggest retailer, Wal-Mart has a learning curve and needs economies of scale. But in today’s world, to achieve such a feat, companies need to be in a commanding position which is thoroughly challenging.

What is the Solution? Reduce dependency of business on price and command significant margins to insulate the bottom lines from frequently changing macroeconomic factors. Here is where, we think Drucker’s advise will come in Handy.

To put this view in perspective, we will look at “Innovation” from the point of view of establishing sustainable competitive advantage. Further, we will take up marketing in the context of redefining your target audience.

For smaller set ups, there may be innovative ways of achieving sustainable competitive advantage and command a reasonable premium on their products. Innovation doesn’t limit itself to creating new products, but also includes new ways of managing business. Some of the ways we know in the context of Indian textile manufacturing are:

1) Design expertise
2) Customer intimacy
3) Higher quality standards
4) Supply chain stability

Competing on other factor such as design expertise, customer intimacy, higher quality standards, and supply chain stability is far more challenging than competing on price and essentially involves top management since these are strategic and long term.

In our next article, we will address each of these strategic options and how they can help businesses command a premium. Watch out for this space for insights into managing textile manufacturing business in India.

Remedies To Counter Strengthening Rupee And Rising Domestic Inflation

In the last article, we briefly discussed the adverse effects of domestic inflation and value of rupee appreciating against the dollar. As a logical extension to the article, it would be appropriate to address the methods to counter this downward pressure on profit margins.

The problem at hand can be addressed from two perspectives, short term and long term.

The long term solution to either inflation or currency appreciation will depend on various macroeconomic factors, such as performance of the economy in general, government interventions in policy making or changing, central bank intervention through foreign exchange trading, etc. A quick look at these factors tells us that some of them are well beyond the control of an individual company. In most likelihood, the problems will persist over the entire length of global economic cycle and their effects may persist even longer due to high interdependence in a closely connected or globalised economy. Although an understanding of all these factors is essential to spot long term trends, influencing them may be need collaborative efforts on the industry level in different dimensions.

We can of course take short term measures internally in the company by strategically aligning most of them towards cost reduction.

From a financial perspective, the quickest measure a small and medium business can take is currency hedging. Foreign exchange can be covered from RBI at least three to four months in advance. Indeed, companies should routinely do this. For those orders, whose hedging has not been done, it may not be too late to take such an initiative. Since prediction of currency spot rate is difficult, it is always a gamble. Speculators may have drastically different idea on how future value will shape. This may also tempt companies to eschew short term hedging but from perspective of stability and cash flow planning, foreign exchange coverage is always a good option.

From an operational perspective, cutting manufacturing costs is an option although efforts can be made in the short term, but its effects will show up only in the medium to long term.

Although the presence of lean manufacturing procedures such as Six Sigma etc are rarely seen to be adopted in the Indian textile manufacturing industry, exploring simpler techniques such as Just In Time (JIT) or Vendor Managed Inventory (VMI) may be useful.

For the orders at hand, say for fabrics and made ups, using internal manufacturing capacity may not be the cheapest option always. At times, sourcing the raw material from low cost manufacturing destination such as China can be explored. Other manufacturing countries which may offer competition to China for specific products may be Bangladesh, Philippines, Indonesia and Viet Nam.

Last but not least, another possibility is sourcing the raw material available in stock. This is a sure and immediate way to reduce costs. Admittedly, this may not be an option in each and every case, thinking in this direction not only for basic raw material but even for accessories and packaging supplies will surely present concrete cost cutting options.

Effect of strengthening rupee and inflation on textile exports from India

During the first week of the New Year 2010, the Indian Rupee touched a new high against the US Dollar to reach 46.22 per Dollar. Although this was a good New Year greeting from the Rupee to importers in India, it may not have pleased the exporter so much. Since then the Rupee has been hovering consistently around 46.2 Rs. values and in the recent weeks, it has appreciated overall. You may check the latest conversion rate here.

In this article, we will concentrate on the Indian textile exporters. Hardly anyone understands the variation in foreign exchange rates better than the Indian textile exporting community as their bottom lines routinely depend on this factor. With globalization and opening of global textile markets under the World Trade Organization, this variation has been affecting their businesses more frequently than ever before. In the recent time also, the appreciation of the rupee against the USD, a currency widely used in trade from this part of the world, has hurt the textile exporters. According to Apparel Export Promotion Council, the adverse effect on margin has been in the range of 8 to 10%.

The variation in exchange rate that adversely affects the textile manufacturers’ profits may be due to seeming unrelated factors such as increase or decrease in capital inflows in the form or Foreign Direct Investment or Foreign Portfolio Investments or RBI intervention as the case may be. The woes of the exporters aren’t limited to the rise of Rupee against the USD. Domestic inflation and rising raw material prices exert further strain on already dwindling profits. For instance, there is a rise in cotton prices globally which makes the procurement of good quality raw material, expensive.

Simple calculation of currency realization per meter of exported fabric will reveal the loss or gain of profits with unit variation of the foreign exchange rate. But the real question to ask is why the Indian textile exporters are so dependent on these factors for his survival? A simplistic explanation is that they are competing on price. Of course, technically any exporter will get affected by rising of domestic currency value but for this variation to become a life threatening issue, is a matter of high concern.

The roots of this issue lie in the formulation of corporate strategy and business strategy and have to do with value proposition of the company. Companies which failed to either innovate or move up the value chain in the long run, so that they can command a premium on their product rather than playing a volume and price game, often find themselves in this situation.

Traditionally, China has been known to compete heavily on price and it successfully dragged manufacturers from other countries such as India, Bangladesh etc in the price competition. It would be unfair to blame everything on the Chinese because fact of the matter is that we had to give in, for the lack of a stronger value proposition.

Supply and demand factors which determine the price of raw cotton which fall under the broadly traded commodities are beyond the control of an average exporter. Although India has strong credentials as far as installed manufacturing capacity and past performance of textile exports in concerned, a lot more remains to be done in terms of having control over the market, which is an agreeably challenging task.

Macroeconomic factors or indicators such as inflation and agricultural yield as a percentage of GDP may not be influenced directly by individual textile exporters but business can surely do well to reorganize their value proposition. In the long run, two solution that will help businesses sustain themselves are innovation and moving up the value chain. As to how exactly that should be done, we will present our suggestions in the next article.

As for short term remedies to counter strengthening rupee and rising domestic inflation, keep watching this space.

Is your excess product really worthless?

In my 5 years of experience of marketing and business development in the Indian textile industry, production of exact quantity of goods was a rare event. This could be due to various reasons such as the growing complexity in consumer demand, the uncertainties in the manufacturing and processing, inefficient quality control, defects in raw material, labour indiscipline, power failures, and a whole gamut of reasons. Although excess production or short packing was a routine phenomenon, both never receive strategic attention. Most managers realize that managing stocks or excess produce could very well reduce their cost of products and ultimately boost bottom lines; rarely do they think this as an important way of supplementing their targets. Most stay focused on delivering the parent order on time, as that itself is a challenge in many cases. And in the process, the stocks are sidelined, stacked in dark corners of a dingy warehouse, and forgotten about.

Are you excess produce really this worthless?

Here, I may be painting a worst case scenario. These stocks, which are revisited at the time of annual events such as auditing and stock clearance, are by then rotten, infected by fungus or found with completely worn out packaging.
In better cases, the stocks from all orders are accumulated at one place and records are kept without an action plan. In my experience, in the Indian context, following are some of the ways to clear stocks:

1) Excess produce forcibly shipped with the parent order to realize some value, sometimes at a discounted price

2) Stocks from all order are accumulated at one place and sold to local dealers by weight in which case it faces a far less value than its original price.

3) Storing them in a warehouse for future clearance

4) Used in making other products to be sold locally or internationally fetching far less realization than their actual value

5) In some case, sent as gift items to government officials. (Believe me, this was a common thing to do!)

In all the above cases, the goods are sold in markets they were originally not meant to be consumed. Why is it a wonder then that these goods fail to generate the value they were meant to generate?

In all cases, it is clear that with some focused effort, all the excess produce can certainly fetch more worth than their “disposal” price. The idea behind www.textilestock.in is precisely this. The stock need not be disposed. It can be sold at a good price to wherever demand is. This web based platform is aimed at matching the demand with the supply of stocks so that it creates a win-win situation or buyers and suppliers. We regularly update the stock details on our website so that clients can directly access product details rather than finding which suppliers may have stocks of their interest. We don’t promise that the stocks will achieve their original sale value, but it will be our best endeavor to realize values better than the disposal values on the excess produce.

It is also a green initiative. We are all aware the as human consumption is growing; the demand for resources is rapidly increasing and their supply constantly under stress. Why not then, let the consumer consume products that would otherwise merely sit in darkness?

Nidhi Saxena

Ways to protect your stock

Ways to protect your stock

Stocks are an integral part any manufacturing process be it industrial goods or fast moving consumer goods. Textile industry is no different and as long as your manufacturing company is selling to retailer, domestic or international, you know that you have a warehouse where stocks are kept and it is a painful reminder of lost value or as some managers may justify, it could be unrealized value. In any case, the money is not in your bank account.

How do you protect your stocks from depreciating, value-wise or even physically? How to protect stocks will emerge from determining what can harm them.
Quality of a warehouse is not of strategic importance in India. Most warehouses are compromised constructions which were not intended to be warehouses. A large number of them are frequently affected by flooding, humidity, pests etc. India is yet to develop high tech warehouses. Nevertheless, it is needless to say that packaging goes a long way in preserving what is inside. This is true for everything right from steel sheets to vegetables.

Simplest thing to do would be to hand the stocks over to professionally-managed warehousing facilities although some numbers will have to be crunched to judge the financial viability of the option. A good quality warehouse with installed security systems may be expensive.

As far as consumer textiles in India are concerned, sometimes goods are dumped in the warehouse as a result of excess packing or rejection in the same form at the time of packing. That packing is designed to withstand only about a month of shipping in protected and fumigated containers. Packaging is rarely designed to contain this contingency of having to store the goods in the same packing material for over 6 months. Hence in most cases, carton packing breaks down, deforming the goods inside. If the polythene wrapping is not strong enough, water, dust, humidity or insects spoil the goods which are then rendered worthless. Investing a relatively insignificant amount to repack or bulk-pack the goods to be warehoused may prove to be a good idea if the goods are to be sold at some point of time in future.
Financially securing the stocks is another way of protecting them. Paying for insurance for the stocks is also a good idea for their protection. Such provisions have been exploited in the past although off hand, I have no evidence to prove it.

Or better yet, how about simply selling them off? This is precisely what we are trying to achieve. www.textilestock.in is focused on selling stocks of textile goods present in India by providing high visibility on the web. We maintain a comprehensive and updated list of textile stocks that gets exposed when customer search for products or supplier. List your stocks with us and we will ensure that they are sold at the best value possible at the earliest.

Samarth Sangal