Published on 18/07/2019 11:54:29 AM | Source: HT Media

Gap in domestic-international cotton prices a poser for yarn mills

Posted in Top Stories| #Commodity #Cotton

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Near-term prospects of cotton spinning mills look bleak. On top of falling acreage in domestic cotton and easing global demand for yarn, the differential in price movement between domestic and overseas markets is an additional challenge. So news over the last two days reporting drop in yarn production across 50-60% of the mills in the south and north is not surprising.

Yarn mills were cushy with stable global cotton prices through cotton season (CS) 2018 and 2019.

What went wrong?

The sudden 18% slump in international prices last week (in a fortnight) upset the cart. Domestic prices, which normally follow suit, have so far fallen only by 7% from the October level.

Perhaps, news of weak cotton acreage and a decadal low in productivity in the current season are keeping the prices elevated. This year’s (CS 2019) estimated cotton output of 343 lakh bales by Cotton Advisory Board of India is lower than the year before, which itself had hit a 12-year low. One bale of cotton weighs 170 kilograms. Also, the increase in minimum support price for cotton, medium and long staple, by 2% and 1.8% for FY20, respectively, will support prices too.

Analysts say that cotton imports in FY20 will, therefore, rise.

To be sure, large mills may able to import cheaper cotton from international markets. However, the small and medium-sized spinners are faced with challenges. Lack of easy access to working capital, inventory holding cost and even letter of credit facilities makes it hard for them to import cotton. Most of them carry two-three months inventory and may not wish to buy more.

More so when yarn offtake has slowed across the globe. According to K Selvarajau, secretary-general, Southern India Mills’ Association, “monthly cotton exports to China and Bangladesh have started falling and current levels show that they are down by half the level in February." Domestic demand is on the ebb too, unless the forthcoming festive season brings some cheer.

Weak demand is mirrored in the recent 6-7% drop in cotton yarn prices. Indian yarn imports into China and Bangladesh are slapped with duty that makes it tough to compete, given stiff competition from Vietnam.

In other words, high domestic cotton prices, poor liquidity and weak consumption of textiles pose a threat to profit margins of mills going forward, although the June quarter may see a better year-on-year performance. Shares of mills such as Vardhman Textiles Ltd, KPR Mills Ltd and Ambika Cotton Mills Ltd slipped on the bourse in the last two weeks, though these are more resilient compared to smaller unlisted spinners.

That said, according to Care Ratings Ltd, "World cotton production is projected to be lower than consumption for the fourth year in a row. This has marginally supported cotton prices in CS19 despite the subdued demand. Production in India and USA declined during CS19 and is expected to lead to shrinking of stockpiles in the world."

This could change the dynamics of the global textile market and domestic yarn mills.