Textile stocks tumble: Here is how the US-Bangladesh trade deal impacts the Indian textile companies

Indian textile and spinning companies are back in focus on Tuesday after a different trade deal, which is expected to adversely impact India’s textile exports. The trade deal between the US and bangladesh concluded on Monday evening, which reduced the overall tariff rates to 19%. Following the development, the textile and spinning industry stocks like Gokaldas Exports (-3%), Nitin Spinners (-2.5%), KPR Mills (-5%), Vardhaman Textiles (-3%) witnessed selling pressure after a decent rally in the past few trading days.

Prima Facae this looks better as tariffs on Indian exports to the US now stand at 18%, lowering from over 50% earlier this year. However, one provision in the US-Bangladesh deal is expected to become a major headwind for the Indian textile and spinning industry.

Key announcements in the US-Bangladesh trade deal

• The total tariff rate on Bangladesh reduced to 19% from 37% earlier, including reciprocal tariffs. Bangladesh remains one of the crucial and key trading partners for the US in terms of textile imports.

• The new trade deal includes an exemption on textile exports from Bangladesh with 0% tariffs and duty, only if the textile is produced using US cotton. Bangladesh is the second-largest cotton importer globally, followed by China and Vietnam

Where does Bangladesh imports cotton from?

Bangladesh recently made a strategic shift in cotton imports away from India to Brazil. Brazil now accounts for ~23-24% of the total cotton imports to Bangladesh, followed by India at ~15%, West Africa at ~15-20% and lastly the US at ~7%-10%. The new development from the trade deal with the US is expected to change the above composition, tilting more towards the US.

How will India’s textile and cotton exports be impacted?

The provision in the US-Bangladesh trade deal is expected to impact the Indian textile industry in two ways. At the primary level, India’s cotton exports to Bangladesh will diminish further and reduce Bangladesh's dependency on Indian cotton. Bangladesh accounts for more than 70% of Indian cotton exports. After the trade deal provisions, India might need to find newer markets to absorb the impact of the drop in Bangladesh cotton exports.

At the secondary level, Indian textile exports to the US could become less competitive. India’s apparel and textiles exports to the US already have single digit share of 5-6%, less than 9-10% of Bangladesh and Vietnam. Post the trade deal, the Bangladesh textile exports will be more affordable if they are made with US cotton.

Stocks in focus

Companies that will be impacted the most by the latest development include names like Vardhaman Textiles, Nitin Spinners, KPR Mills, Nahar Spinning Mills, and Ambika Cotton Mills. These companies hold significant yarn processing capacities and will be forced to look for newer markets other than the US.