Stung by local cotton prices, Chinese yarn makers go global

Tue Jan 14, 2014 4:00pm EST

* Domestic stockpiling has driven up cotton prices, crippled millers

* Around 15 firms have moved operations to Vietnam -trader

* Some looking further afield, even to the United States

By Dominique Patton and Lewa Pardomuan

BEIJING/SINGAPORE, Jan 15 (Reuters) - Chinese yarn makers, crippled by artificially high prices for cotton at home, are shifting production overseas to secure cheaper raw materials, even going as far afield as the United States.

In what promises to be a major shakeup of China's cotton milling industry, the world's largest, firms such as Hong Kong-listed Texhong Textile Group and Shanghai-listed Bros Eastern Co are leading the charge abroad.

The trend looks set to boost demand in international cotton markets, bolstering prices that climbed 13 percent last year when U.S. farmers planted their smallest crop in four years amid worries over record global inventory.

China holds more than half the world's cotton stocks after three years of state-sponsored hoarding to support farmers. That has sent local prices for raw fibre soaring, hurting mills which are also subject to a strict quota system for cheaper imports.

"The government has over the last few years supported the farmers and basically ignored the spinners," said Dennis Lam, analyst at DBS Vickers in Hong Kong. "Across the board it's been very tough, there's an exodus of capacity."

Vietnam has emerged as the favourite destination due to its free access to global cotton markets and a border with China, as well as an agreement between the two for duty-free yarn exports.

Around 15 Chinese cotton mills have set up in Vietnam in the last 18 months, said Alex Hsu, general manager at Taiwan cotton trader Formosa Cotton, a supplier to yarn makers around the region including in China and Vietnam.

Yarn makers, or millers, spin raw fibre into yarn, which they turn into textiles themselves or sell on to textile firms.

Of the roughly 250 million spindles worldwide, about 120 million are in China, versus 48 million in No.2 yarn maker, India, International Textile Manufacturers Federation data shows.

China's state reserves were paying 20,400 yuan ($3,400) per tonne of cotton last year, almost double New York futures.

GO WEST

Beyond access to cheap cotton, Vietnam's appeal also includes low operating costs and a robust logistics network, but other destinations could grow in popularity.

"Almost everybody, especially India, Indonesia, and even South Korea and the U.S. are more competitive than China if you include raw material costs," said ITMF Director General Christian Schindler, noting that cotton makes up 50-70 percent of manufacturing costs in spinning.

Indeed, Hangzhou-based Keer Group is on track to be the first Chinese yarn maker to set up in the United States - expected to break ground on a $218 million spinning factory in South Carolina in February.

Keer Chairman Zhu Shanqing said the investment was driven by proximity to cotton producers and access to Charleston port from where it would ship yarn back to China.

Lower international cotton prices were also a major incentive for the 30,000-tonne-per-year factory, said a management board official who declined to be named.

"If you have a highly automated machine, then (U.S.) labour costs are very low," said Schindler. "How strong this trend will be, however, remains to be seen. You need downstream industries to make a good case and the weaving industry has seen significant reduction in the U.S."

Chinese yarn makers have been showing interest in Pakistan, said a source at the country's Beijing embassy. Textile firm Shandong Ruyi Science & Technology Group has announced plans to acquire a 52-percent stake in yarn and clothing company Masood Textile Mills.

And India, with a larger workforce than Vietnam and a more established yarn industry, also has potential.

ITMF's Schindler said that while there has been no talk of actual Chinese investment to date, China's labour costs were rising more rapidly than in India, suggesting that such a move could be on the cards down the line.

KEY MARKETS

Access to growing demand overseas is also pushing yarn makers abroad. Although still the world's top buyer of cotton, Chinese consumption has fallen almost 30 percent since 2009, while imports have risen in neighbouring countries.

And Vietnamese garment makers will be beneficiaries of the Trans-Pacific Partnership, a free trade bloc to include markets such as the United States and Japan, bolstering appetite for yarn.

"Prior to 2012 there was just one Chinese mill operating in Vietnam with any real investment," said Formosa's Hsu. That firm, Texhong, has rapidly expanded over the last two years to benefit from lower cotton prices, exporting yarn back to China.

Texhong has 730,000 spindles in Vietnam, about 40 percent of its total output. That will grow to 50 percent by March.

"Vietnam's cotton is internationally traded, it's not controlled by import quotas like China," said Chairman Hong Tianzhu.

Bros Eastern, another of China's largest spinners, started production at a $98 million factory in Vietnam in November, partly due to the plentiful supply of raw cotton.

Shenzhen-based Huafu has recently visited the country to explore investment, said a source. The company declined comment.

NO FUTURE?

The wave of investment comes as China, forced to lease grain warehouses for its overflowing cotton stocks, evaluates a plan to scrap the stockpiling programme after intense lobbying from the textile sector.

But even if the policy is canned, spinners will keep moving abroad or face rapid consolidation, say industry watchers.

Many small mills have already gone under while others are turning to importing, rather than manufacturing, yarn.

Larger firms have survived by moving into more complex blended products or synthetic fibres such as spandex.

"Yarn is a fairly commoditised product so in volumes it comes down to cost and China has never really been that cheap. Their (advantage) is really downstream, in high-value garments," said Formosa's Hsu.

Keen to promote higher value industries, Beijing may simply allow small cotton mills to die out, helping larger ones consolidate and increase efficiency.

But big yarn makers say overseas investment offers valuable diversification for the long-term.

"China's policy could change very quickly but it won't remove the whole (cotton) price gap all at once," said Texhong's Hong.

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