Synthetic yarn industry hopes to bounce back in Q2 of FY16

Fall in crude prices has reduced input prices in third quarter, which could ease costs and improve margins for yarn makers

The first two quarters of the current financial year have seen sluggish demand and inventory losses for synthetic yarn makers, along with growing Chinese dumping of yarn in India.

However, the fall in crude oil prices has resulted in prices of raw materials coming down in the third quarter, which is likely to ease costs and improve margins for yarn makers in the second half of current financial year.

According to industry sources, polyester fibre prices came down from roughly Rs 107 per kg to Rs 86 per kg in October.  This has already resulted in synthetic yarn prices responding with a Rs 3 to 4 per kg improvement in average prices, raising it to Rs 174 to 175 per kg.

“The next quarter may improve the situation for synthetic yarn makers, with mills raising demand gradually. Mills too were bleeding, resulting in loss of margins for synthetic yarn makers for the first two quarters.  Many were even incurring cash losses,” said K Selvaraju, secretary general of Southern India Mills Association (SIMA).

According to O P Lohia, chairman and managing director, Indo Rama Synthetics (India) Limited, performance of synthetic yarn makers was adversely impacted due to the crash in crude oil prices, huge volatility in the foreign exchange market and depreciation of the rupee. “Sluggish demand among mills and a fall in raw material prices resulted in a high level of finished goods stocks and inventory losses,” said Lohia.

Commenting on the outlook for the remaining two quarters of the financial year, Lohia said, “Led by the continual fall in crude prices, raw material prices have begun falling, which has eased margins a bit. We are also anticipating an uptake in demand from mills which should help yarn makers like us improve margins.”

As per an India Ratings & Research report, the fall in crude prices and industry over-capacity resulted in polyethylene terephthalate (PET) chips prices, an important raw material for man-made yarn, falling to Rs 64 per kg in March from Rs 87 per kg in the previous year, while the price for partially oriented yarn (POY) fell 22 per cent year-on-year (y-o-y) in March 2015 to Rs 76 per kg.

Meanwhile, the government's recent move to extend a two per cent duty drawback on synthetic yarn, among other products, is also being anticipated to improve the scenario for the industry.

"For the first time, three count groups have been given for yarn based on the request made by the Association so that the value added yarn producers would get better compensation under the duty drawback system," SIMA deputy chairman, P Nataraj said in an official communique.