A decrease in cotton prices gives spinning mills hope.
Cotton prices in India have been on a downward trend in recent months. In fact, this is a matter of concern for cotton growers, but spinners are feeling good after struggling for several quarters.
There are several reasons that support the forecast that cotton prices are likely to remain low for some time. The most important reason is that cotton production is expected to increase by 9% to 37.7 million bales during the current cotton year. A bale weighs 170 kg. Some northern states are expected to have bumper crops, while production in southern states has been affected due to pest attacks and unseasonal winter rains.
At the same time, global cotton production is picking up. After a partial recovery in calendar year 2017 from a 13-year low in 2016, global production is forecast to pick up, showing a good growth of 11-13% in 2018. Therefore, both domestic and global conditions are supporting a decline in cotton prices.
Meanwhile, a reduction in Chinese cotton imports following a policy change designed to support the domestic industry has upset the price cycle in international markets. China is one of the major consumers of cotton and cotton yarn.
Any improved momentum in imports by China could support a recovery in global cotton prices. For the time being, this seems unlikely. Domestically too, hybrid-6 grade cotton is selling at Rs 107 per kg, much lower than the highs of Rs 130-140 per kg in August.
With news of higher production after harvest in October, cotton prices are trending downwards. The question is whether any policy intervention will push prices higher, given the importance of farmers' vote in the upcoming general elections.
Certainly, lower cotton prices bring relief to the spinning industry, which has recorded weak sales growth and profit margins in the last four quarters. Credit rating agency ICRA Ltd has explored the reasons for the pressure in spinning mills in a report: “In the quarter ended September 2016, volumes were impacted due to a sharp fall in exports to China, but the impact of demonetisation in the following quarter impacted volumes.
ICRA’s sample of 13 spinning mills showed a weak trend in volumes in recent times and pressure on contribution margins, partly driven by volatile cotton prices. Overall operating profit of ICRA’s sample remained 6-12% lower than the healthy levels seen in FY13 and FY14, although 3% higher than FY16. No wonder yarn mills would be happy with the fall in cotton prices. However, ultimately currency movements and demand will remain the key determinants of profitability of yarn mills, especially exporters.
