LPG price rise textile exporters: Why India’s textile export margins are under pressure Since the recent commercial LPG price hike What is the main issue? Textile exporters are struggling to find a way to make money when they are paying high costs to manufacture their products, but they have trouble charging their international buyers higher prices.
Most textile export orders are made ahead of time, with a set price that has to be maintained for the duration of the contract, even if the price of the necessary fuel, labour, and materials to make the product goes up after the contract was made. This puts extreme pressure on margins.
In a nutshell, exporters are between a rock and a hard place:
1. LPG and production costs are going up.
2. Global buyers are asking for lower prices.
3. Exporters cannot change fixed prices that have already been agreed upon.
4. Smaller businesses have very little ability to absorb unexpected increases in cost.
Thus, the alternative rise of LPG as a fuel is also impacting the textile export margin as a major issue.
Why is LPG important for textile exporters? LPG is a major fuel source for many of the processes and products that utilise textiles in their production. While LPG will be used in the heating function of the process, it will be used in additional factory activities before the shipping of a final garment.
Some of the ways in which textile facilities will utilise LPG are for:
1. Fabrics that are dyed
2. Washing garments
3. Drying finished garments
4. Steam production
5. Finishing and processing activities
6. Heat-based processing activities in the production area
As a result, the price of LPG will directly impact the total production cost of a final garment. When the price of LPG increases, the overall cost of producing a garment, knit product, or processed fabric will also increase.
Exporters are in a precarious position as the increase in production costs caused by rising LPG prices puts additional strain on an already-low margin for export sales. The Economic Times recently published articles discussing how textile exporters are being pressured to give discount pricing because of the combination of increasing LPG prices and pressure from international buyers to discount their prices.
How commercial LPG price hike affects textile export margins Since fuel is a recurring expense of production, the increase in commercial LPG pricing also significantly impacts the exporter’s margins of profit on textiles. Unlike a one-time purchase of a machine, LPG is used on an ongoing daily basis in a factory’s operations.
With an increase in the price of LPG, the garment exporter will incur higher daily operating expenses; however, the exporter will not be able to increase their export selling price all the time because the buyer has several other options to choose from (other countries where the same garment can be purchased for a lower price).
This puts pressure on the exporter’s margins of profit.
For example, if a garment exporter has contracted to supply products to a buyer at an agreed-upon fixed price, the exporter is still required to deliver the product at the negotiated price even after the price of LPG has increased, and the exporter has incurred additional costs.
Exporters may not be able to revise their selling price and/or accept the new costs of production because they are currently competing in a very competitive global market environment.
Therefore, for the exporter, there are limited options available:
1. Accept a lower profit.
2. Cut costs in other areas of operation.
3. Defer growth or investments.
4. Reduce their production efficiencies.
5. Avoid non-beneficial orders with low margins of profit.
None of these options is beneficial for the long-term viability of the textile industry.
Why Tiruppur textile exporters are under pressure Tiruppur has established itself as a major export destination for knitwear in India. The number of garment exporting units located in Tiruppur has enabled the city to help support India’s position in the global textile export market.
The impact on exporters in Tiruppur is serious, as knitwear manufacturing involves several processes that are reliant on energy. The main processes include dyeing, washing, finishing, and drying of garments.
As a result, when there is an increase in the price of LPG, the overall cost of the processes becomes greater.
A small increase in the cost of producing one unit can create a significant impact for the overall facility in Tiruppur due to the amount of product manufactured and exported.
Manufacturers and suppliers that produce large order quantities for export are especially affected due to pricing being set before production.
In addition to this problem, global customers are requesting discounts while input costs continue to increase.
Why Noida's apparel exporters are facing double pressure Apparel exporters located in Noida are experiencing a dual cost dilemma. Exports from Noida are feeling the effects associated with both the rise in LPG prices and the increase in labour wages (effective from 1 April 2023) following the Minimum Wages revision by the Government of Uttar Pradesh, as indicated by a story published in the Economic Times.
Specifically, Noida-based apparel factories are experiencing pressure from both:
1. Increased cost of fuel due to an increase in the price of LPG.
2. Increased cost of labour due to the revision of minimum wages.
This creates a greater challenge for small and medium-sized apparel exporters. A large percentage of these businesses do not have significant cash reserves. Their profit margins are very small, and unexpected cost increases create cash flow issues.
As a result of this increased cost of LPG
Why exporters cannot easily increase prices Due to the intense level of competition in the export clothing market, it is arduous for a textile exporter to raise its prices to cover increases in costs. International purchasers of textiles generally assess several suppliers from multiple international trading outlets before committing to purchase from one supplier.
Countries, such as Bangladesh and Vietnam, also compete with India when it comes to producing/exporting textiles. The Indian exporter faces the risk that if he increases his prices disproportionately, the buyer can simply seek an alternative supplier to fill his order.
Another concern is the use of forward contracts. Exporters typically accept orders from their buyers weeks or months prior to the anticipated delivery date. Once the price has been finalised with the buyer, there is little that the exporter can do to re-negotiate the price with the buyer to cover any increases that have been incurred (such as the price increase due to higher prices for LPG).
It's very frustrating. The exporter experiences a cost increase while still being subject to the price for textiles as negotiated with the global buyer.
Global buyers demand discounts while costs rise Rising LPG prices contribute to pressure on Indian textiles, as global buyers are seeking improved pricing from exporters in India, creating a double whammy.
1. The first part of the double whammy is that input costs are increasing.
2. The second part is that buyers' price perceptions are decreasing.
Typically, when exporters face increases in the cost of inputs, they can attempt to pass those costs onto buyers; however, when buyers demand discounts, exporters are compelled to incur the additional costs themselves.
At this point, the business becomes challenging; an exporter could be using all production capacity; however, profits will still decrease on each order due to the lessening of margins.
This means that for exporters to the textile industry, it is not just about the volume of sales, but rather if those sales are profitable.
Impact on small and medium textile units The increase in the price of LPG (liquefied petroleum gas) is likely to have a disproportionate effect on small- and medium-sized textile manufacturers who typically experience greater pressure on their cash flow and have significantly less leverage when negotiating price than larger manufacturers do.
Some of the factors impacting small- and medium-sized manufacturers include:
1. No long-term fuel supply contracts.
2. Inability to access lower-cost alternative fuels.
3. Little to no pricing power with their customers.
4. Limited financial reserves.
5. Outdated equipment that is energy inefficient.
As a result, the sudden increases in the price of LPG will create an immediate impact on their day-to-day operations.
If this situation continues, it may cause further reductions in production, delays in making new purchase orders, delays in paying suppliers, or reductions in capital expenditures for upgrading technology and expanding their businesses.
Why this is a competitiveness issue for India Rising LPG prices are not only an issue of cost but also one of competitiveness for the Indian textile export industry.
In the event that the cost of producing textile clothing increases in India, it will likely make it harder for manufacturers who export textiles to compete on a global scale. Importers who rely on price alone may seek to purchase products from countries where the cost of producing textiles is lower.
As a result, India may lose its competitive positioning as a leader in exporting textiles globally.
India has several competitive advantages in textile manufacturing, including an available skilled labour force, well-established manufacturing clusters, a plentiful fibre resource in cotton, and an extensive supplier base. However, if textile exporters do not receive sufficient support or improvement in their costs of production via greater efficiency, then the rising costs of fuel and labour will further diminish these competitive advantages.
Read More: Pahal Scheme: A Complete Guide to LPG Subsidy Benefits and Eligibility Criteria
Possible solutions for textile exporters Textile exporters may need to look at both short-term and long-term solutions to manage the pressure.
In the short term, exporters may focus on:
1. Better fuel usage planning
2. Reducing energy wastage
3. Improving production scheduling
4. Renegotiating future contracts with cost clauses
5. Prioritising higher-margin orders
In the long term, exporters may explore:
1. Energy-efficient boilers
2. Alternative fuel systems
3. Solar or hybrid energy options
4. Process automation
5. Better heat recovery systems
6. Cluster-level energy infrastructure
However, these improvements require investment. Smaller exporters may need easier credit, policy support, or industry-level assistance to adopt such changes.
Key takeaways The rise in LPG prices is affecting exports of textiles globally. While there is demand for lower prices from global buyers, the cost of production for exporters has risen because of the increase in the cost of LPG. Export hubs like Noida and Tiruppur are being affected because LPG is used in many significant textile processes, including dyeing, finishing, washing, drying and generating steam.
The primary issue facing exporters is that they are unable to pass on the increased costs to buyers because of fixed contracts and global competition. This will put continued pressure on profit margins, especially for smaller and medium-sized textile units.
Conclusion India's textile export sector must currently deal with two contrasting forces: there has been a huge surge in domestic prices for all fuels, especially commercial LPG, while at the same time, there is international pressure to lower prices.
This divergence between rising production costs and reduced buyer price expectations is an enormous squeeze on textile export margins.
In addition to the price of fuel, for textile hubs like Tiruppur and Noida, this issue is about the survival of their businesses, the future of their global competitiveness, and the continued viability of India's textile export
If the textile exporters cannot find some relief in terms of cost stability, superior energy alternatives or increased operational efficiencies, then the current margin pressures will most likely last into the foreseeable future.
To stay informed about what is happening with Indian exports, manufacturing costs, MSME challenges, and business policy changes, please check out our latest industry insights and practical business guides.
Read More: MSME Classification: A Complete Guide to Understanding MSME Criteria
FAQs What is the impact of LPG price rise on textile exporters? Due to its extensive applications in dyeing, washing, drying, finishing and generating steam, the increase in LPG prices creates an increase in production costs for textile exporters and subsequently brings down profit margins with currently fixed export pricing.
Why are Tiruppur textile exporters affected by LPG price hike? Exporters from the knitwear hub of Tiruppur are reliant upon LPG for their fabric processing and garment finishing. In turn, higher LPG prices further increase these exporters' overall production costs.
Why can’t textile exporters increase prices after LPG cost rises? Most exporters are required to work with fixed-price contracts with their international customers. Once the order price is determined and confirmed by both parties, it is usually not possible for the exporter to pass along increased costs due to the increase in LPG prices or other production costs.
How does a LPG price rise affect small textile units? The margins and cash reserves of small textile units are typically very limited. A sudden increase in LPG prices can lead to a significant decrease in profits, put additional stress on cash flow and create very difficult competitive challenges for small textile units when compared to larger exporters.
Can LPG price rise affect India’s textile exports? As a result, the high production costs associated with higher LPG prices will make Indian textile products less price-competitive when compared to similar goods produced in Bangladesh and Vietnam.
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