A textile industry representative says this week's closure of a South Otago yarn factory is another sign of the pressure the wool processing industry is under.

Qualityarns in Milton laid off 28 staff this week.

The factory has been making specialist weaving yarns in the town's old woollen mill for 11 years.

Managing director Mike Barra says it has become impossible to compete with imported yarns.

He says that is because of New Zealand's free trade agreement with China and because of compliance costs from the likes of the Emissions Trading Scheme, Resource Management Act and ACC.

The chairman of the industry body Textiles New Zealand, Ian Barbour, sees those as contributing factors but not the underlying issue facing the industry, which he says has more to do with the end products and the markets they go to.

He says the closure of the yarn factory is going to hit woollen goods manufacturers whose supplies will be cut off overnight.

Mr Barra says he hopes some part of the Qualityarns operation can be saved in a deal with its main customers.