The recent surge in cotton prices has added to the challenges faced by yarn mills.
compounded by weak demand both domestically and globally. This surge, which saw domestic cotton prices rising by 10-12% in just two weeks, is a cause for concern for the textile industry. The Southern India Mills Association (SIMA) has warned against panic buying, fearing it would further squeeze profit margins already strained by low demand.
One of the reasons for the price increase is the limited availability of working capital for medium and small spinning mills, which struggle to procure cotton during peak seasons. Large traders take advantage of this situation by stocking up and selling cotton at higher prices during off-seasons. Additionally, anticipation of higher minimum support prices (MSP) for farmers and international factors like the weaker crop forecast in the United States contribute to the surge in domestic cotton prices.
The current scenario of rising cotton prices is particularly challenging because it coincides with stagnant demand for yarn and cotton textiles. Despite some improvement in business sentiment, the International Textile Manufacturers' Federation (ITMF) Global Textile Industry Survey indicates persistently weak demand, influenced by factors like global geopolitics, inflation, and high interest rates.
The utilization levels in the textile industry are below 70%, indicating excess capacity. The recovery in demand is expected to reflect in higher utilization levels, but until then, any increase in cotton prices will further strain profit margins. The cautionary note from SIMA, highlighting the expected increase in global cotton availability post-July 2024, suggests that rushing to buy cotton at elevated prices may not be wise.
In summary, the surge in cotton prices exacerbates the challenges faced by the textile industry, which is grappling with weak demand and excess capacity. Unless there's a sustainable increase in demand, mills are likely to face further pressure on their revenues and profit margins.
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