India, which once led as a cotton yarn supplying nation to China is now been relinquished to second position. This was done by not so powerful as an economy or a textile giant, Vietnam. And this not the story of aberration, it has been the top supplier of cotton yarn to China since March 2016, when it overtook India. And that too, at a much higher unit price realization than India and also Pakistan, the lowest in the rung.

Why is China preferring high cost cotton yarn from Vietnam? My earlier story of 24 August titled China cutting yarn imports, significantly reduces supply from India covered the CIF value comparison between India, Vietnam and Pakistan – the three major suppliers for all goods covered under HS codes 5204, 5205,5206, and 5207.

To reiterate with an update to my previous story with numbers available for July 2016, Pakistan was the cheapest supplier of cotton yarn for China, followed by India and then Vietnam. In July, average import price for cotton yarn from the World into China was US$2.55 per kg. The same from Pakistan was US$2.18 a kg, from India US$2.42 a kg and US$2.59 from Vietnam. Similarly, in July 2015, the numbers were at US$2.75 a kg (Total), US$2.28 a kg (Pakistan), US$2.72 a kg (India) and US$2.83 a kg (Vietnam). Thus, it is apparent that prices have dropped over the year, Vietnam prices continue to be remain the highest and Pakistan the lowest.

So coming back to the question, Why China has increased high priced import from Vietnam. I see four components in the pricing of Vietnam’s yarn. First, the low but rising cost of production, high raw material due to elevated cotton prices, product margin and the returns on investment of Chinese investors in Vietnam. Although, no value can be specified to the fourth element, it is evident that China had invested large money into Vietnam to take advantage of its low cost labor. If they pay more money to Vietnam it will come back as ROI into Chinese economy.

During the first seven months of 2016, China’s import of cotton yarn from Vietnam increased 7% to US$866 million with shipment aggregating 334 million kgs. In similar comparison, import from India declined 42% to US$635 million (263 million kgs) and that from Pakistan was down 41% at US$482 million (220 million kgs). In February 2016, import from India was worth US$76 million and that from Vietnam was US$64 million. From March onwards import from India remained below US$100 million while Vietnam averaged US$140 million.

In the last two years, labor cost has been rising rapidly in Vietnam. The low-cost country is now clearly confronted with an excessive rise in its labour costs, after minimum wages were repeatedly raised in the past years. A fresh bout of increase of 7.3% - far above inflation rate, is being proposed for next year, which may hamper exports for Vietnam and make yarn costlier for Chinese buyers. Will Indian suppliers respond proactively to regain its market share in China? I don’t think so, because they were equally naïve to the influx of Vietnam’s yarn into China, which have been building over months now.

Courtesy: YnFx – Fibre and yarn Exports - India