Home / Market / Mark-to-market /  Yarn mills faced with difficult odds as domestic cotton prices spurt

Worries loom over cotton spinning mills as multiple global factors play out to influence the demand for and the price of yarn as well as that of cotton—the critical raw material.

So far, in the last four-six quarters, it was a stable ride up the profitability graph for yarn mills. Demand for yarn was moderate and cotton prices were stable.

The spanner in the wheel is the recent and sudden spurt in cotton prices, which is higher than that of yarn. Since January, the price of the benchmark Sankar-6 variety of cotton has jumped by 19%, whereas that of 30s-count yarn is up 11% (inclusive of duties).

If the trend continues, then mills, especially the mid- and small-sized units, will take a beating on margins. The larger mills are tiding over the problem through imports. “Large mills have started buying West African cotton as costs are lower," said K. Selvaraju, secretary general of the Southern India Mills’ Association. At current price levels, imported cotton works out cheaper by 2,000 per candy of 355kg. Industry experts say that the cotton imports for the season will surpass projections.

Why are domestic cotton prices ruling high? Some say that the acreage under cotton cultivation is down, after two seasons of deficit rainfall. So, cotton production is likely to fall to a five-year low of 35.2 million bales (a bale is 217.7kg) for the 2015-16 season ending September, or perhaps even lower. But then, there are the optimists who reckon that traders hoarding stock in anticipation of a shortage are creating an artificial scarcity in local markets.

Now, higher cotton prices would not have been an issue if the mills could pass it on to the customers. Until now, they managed to do so. But demand growth may moderate in international markets. China’s decision to offload its huge inventory of cotton has trimmed demand for yarn and cotton. Note that normally a third of India’s yarn exports are to China. However, mills are confident that other Asian markets may fill the gap, at least in the long term. Hopefully, domestic demand is good too.

Another dimension to watch out for is the economic and trade outlook in the European Union, following Brexit. A note by Crisil Ltd says that Europe is the single largest destination for India’s garment exports accounting for about 35% of revenue. Any slowdown can have a cascading effect, although with a lag, on demand for yarn too.

For now, large firms in the listed universe like Vardhman Textiles Ltd, KPR Mill Ltd and Ambika Cotton Mills Ltd are unscathed. Although they have posted negligible revenue growth in the last four quarters, operating margin inched up thanks to the firms’ ability to pass on costs.

But if cotton prices don’t cool off in the long run against a backdrop of softening yarn demand, then mills may spin a woeful yarn.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout