Global cotton prices have been on the upswing for the last several months. Between October and February, cotton prices surged by about 60% in world markets, spurred by unabated demand from China, which accounts for a little less than half the world’s consumption of cotton. This, coupled with a growing shortage in Chinese production of the fibre and a ban on exports from India, has kept global prices high. In fact, industry experts say that cotton prices during the current season (September 2010-October 2011) will be double the average of the previous season.
In India, cotton prices in February were about 110% higher (Shankar-6 variety) than the year-ago period, touching all-time highs. They may soften marginally as the rush to meet export obligations cools off.
However, spinning units will certainly feel the heat as yarn prices are not moving in tandem. Most of the large spinning mills will get a major portion of their cotton requirement for fiscal 2012 during the current cotton season ending October. According to C. Sridhar, head of Crisil Research, “Yarn mills would see their procurement costs rise by 30-35% for fiscal 2012, but they are unlikely to be in a position to pass on the higher cost to customers (weavers), as there could be resistance or even a shift to use of blended yarn.”
According to the Cotton Advisory Board data, the spinning industry’s closing stock for fiscal 2011 would be three times that of the previous year. This along with additional yarn produced would increase supply to keep prices lower. In short, yarn mills would see a squeeze in profits, as higher stock would also increase the carrying cost and increase interest expenses.
In a recent report, Crisil Research estimates that if the current season continues to see higher cotton prices, it may reduce the operating profit margins of yarn mills during fiscal 2012 by at least 200-250 basis points. One basis point is one-hundredth of a percentage point.
Can one infer then that the profitability of yarn mills has peaked? Firms such as Vardhman Textiles Ltd, KPR Mill Ltd, Alok Industries Ltd and Suryavanshi Mills Ltd had registered robust 300-400 basis points increases in operating profit margins between fiscal 2010 and 2011. Analysts estimate the operating profit margin may fall to about 14% in fiscal 2012 from an industry average of around 16.5% in the current fiscal.
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