Chinese economy casts its shadow over Indian exports of cotton and copper

Indian companies in the commodity business from sectors including cotton and yarn, metals and mining, and capital goods are facing the brunt of structural changes in the Chinese economy. As China shifts to a consumption-driven economy after focusing on manufacturing for decades, China’s import of commodity products is on the decline, while its exports of finished products is rising due to excess manufacturing capacity.

China imported 7 per cent less cotton yarn from India in the three months to October 2015 over the preceding three months; the fall in import was sharp in October. This is a negative for companies like Vardhman, Nitin Spinners, RSWM, Sutlej Textiles, Nahar spinning which are in this space.

"China has reduced its imports of cotton. Cotton prices have been falling over the last few months.


Revenue of cotton yarn manufacturing companies may fall in the 5 per cent-10 per cent range in the second half,” said Sanjay Jain, VP, Hosiery Manufacturer Association of India. This could be a positive for domestic garment manufacturers as there will be abundant raw material available. Several companies such as Indocount, Welspun India, Nandan Denim, Page Industries, Gokaldas and Arvind will benefit The jump in profitability of these textile manufacturers and sharp run-up in stock prices can be attributed to this structural change.

The mining and minerals sector is facing a similar pressure. India’s copper export to China fell 44 per cent in April to October 2015 over last year. Copper is among the topfive export items to China. Therefore, a fall in Chinese import has impacted Indian copper producers. In addition, China started exporting iron ore to India. Its export to India rose 10 per cent thereby putting pressure on Indian iron ore prices. This is a double whammy for Vedanta, which supplies copper and iron ore. NMDC, an iron ore miner, too, is under pressure. A sharp drop in earnings has resulted in a 60 per cent drop in Vedanta’s stock whereas NMDC’s stock has fallen 40 per cent in the current calendar year so far.

Excess capacity and higher competitiveness of Chinese capital goods players will continue to impact volume growth and profitability of BHEL, Thermax and L&T. The stocks of these companies are down 10-35 per cent in the year till date.