Whalesbook
Rising Costs Force Production Cuts
The ongoing crisis in West Asia has led to major cost increases for Surat's crucial textile industry. Global crude oil prices have surged past $100 a barrel, pushing up prices for oil-based materials like polyester and nylon. In just days, key man-made fibre (MMF) raw materials such as Polyester Staple Fibre (PSF), Polyester Filament Yarn (PFY), and Partially Oriented Yarn (POY) jumped 15% to 25%.
Combined with freight charges that have reportedly risen as much as 400%, these higher input costs are cutting into profit margins for factories that import and export goods. Many Surat textile units, known as India's 'Synthetic Capital' and operating around 10 lakh looms, are now cutting production by up to 50%. The market reaction shows this pressure, with immediate deliveries scarce and manufacturers considering weekly shutdowns to limit losses.
Global Price Shocks Hit Key Materials
Surat's role as a major hub, producing 40% of India's man-made fabric, makes it highly sensitive to changes in MMF markets. MMF now accounts for about 77% of global fiber use, a trend India is following, though its own production share lags behind leaders like Vietnam and China. While India is the third-largest synthetic fiber producer globally, its competitiveness suffers from structural issues.
India's Textile Sector Faces Cost Hurdles
For example, India faces higher electricity costs than competitors such as Bangladesh and Vietnam. Import duties on synthetic yarn in India range from 11% to 27%, unlike the zero duty in Bangladesh. An inverted GST structure, where raw materials are taxed at 18% and finished goods at 5%, further increases costs. Government initiatives like the PLI Scheme for Textiles and PM MITRA Parks aim to strengthen the MMF sector through scaling up and modernizing infrastructure, but these long-term plans offer little immediate help. The sector's financial performance reflects these issues, with 1-month returns at -7.25% and 1-year returns at -7.76%, showing how volatile input costs can offset growth potential.
Underlying Weaknesses Exposed
Surat's textile industry, despite its size, faces significant weaknesses. Its heavy reliance on MMF, which comes from crude oil, makes it easily affected by geopolitical energy shocks. The current crisis highlights how external events can cause disruptions domestically. The industry is mainly run by small and medium-sized businesses (MSMEs), many using older machinery and lacking the financial cushion to handle prolonged price increases or the funds for upgrades.
This fragmented nature leads to less efficient logistics and higher operating costs. An ongoing labor shortage, worsened as migrant workers go home due to disruptions in supplies like LPG, makes it hard for factories to keep running. For smaller weavers, whether they can afford to keep operating is a major worry, leading them to be hesitant about buying costlier yarn as fabric demand is low. The sector also suffers from higher power costs and import duties on raw materials compared to neighboring countries, creating further competitive disadvantages.
Outlook: Balancing Crisis and Reform
The Indian government is pursuing reforms, including schemes to boost MMF and technical textiles, and has removed some quality control orders to potentially lower input costs. However, the immediate future for Surat's textile hub remains challenging. Analysts expect that government actions and modernization efforts will eventually ease cost pressures and improve efficiency, but the current geopolitical situation poses a significant challenge.
The success of long-term strategies, like the National Fibre Scheme and better logistics, will be key to managing the sector's reliance on unstable global commodity prices and improving its standing against global competitors like China and Vietnam. How the industry handles these immediate problems while making structural improvements will test its strength.