As far as the economic production of cotton yarn is concerned, the impact of cotton cost is more over-riding than any other single element of cost.
This is because cotton cost accounts for about 60% of the yarn price, ranging from 50% in fine counts such as 80s to 70% in coarse counts like 20s.
With spinning mills earning an average net profit margin (that is, after depreciation and interest) of only 2% of sales during normal trading conditions, changes in cotton cost relative to yarn price play a very crucial role in determining a mill’s profits or otherwise.
Using the data furnished by the mills in the last 20 CPQ studies, a detailed analysis was made on the changes in yarn prices and cotton costs during 1997-2006 for some popular counts.
Salient findings of the analysis are given below and the relevant data.
1. During the last 10 year period (1997-2006), domestic cotton yarn prices registered a 11% increase, ie @ 1% increase per year compounded. Export yarn prices, however, recorded a marginal drop of about 3% during this period.
2. Yarn prices – for both domestic and export – fluctuated widely between years, the overall mean deviation being about 4.5%.
3. Cotton cost per kg of yarn recorded an increase of 2% in the domestic yarns but showed about 2% drop in the export yarns.
4. Fluctuations in cotton costs (per kg of yarn) during the 10 year period are very high with an overall mean deviation of about 7.5%.
5. Cotton costs relative to yarn prices registered a significant drop of about 8% in the domestic yarns. In absolute value, the fall amounts to about 5 percentage points which is 2 to 3 times the net profit margin a spinning mill can earn under normal trading conditions. However, the export yarns did not show any change.
6. During the 10 year period, the net out-put value in the domestic yarns registered an increase of about Rs 2000 per spindle per year, ranging from Rs 1500 in 40s CH and 100s C to Rs 2900 in 30s CH. This overall increase is due to increase in NOV per kg as well as production per spindle, almost in equal proportions.
7. In the case of export yarns, the overall increase in NOV in 2006, as compared to 1997, is low at Rs 720 per spindle which is only one-third of the corresponding increase in the domestic yarns. Though the production per spindle registered an increase of about 18%, the drop in NOV per kg has lowered the NOV per spindle drastically.
8. Since the increase in yarn prices in recent years is at a very low rate, profitability of spinning mills presently depends largely on the cotton cost.
