Graphic: Mint
Graphic: Mint

Why domestic cotton prices are likely to rule firm this season

If spinning mills are able to pass on the higher cotton prices to users, it may alleviate the burden of rising input costs

Come October, in India, it’s time for the arrival of the new domestic cotton. Spinning mills look to forecasts on cotton output and prices to plan their production. This time round, in cotton season 2019, there is some anxiety among spinning mills, in spite of demand for yarn being strong.

All indicators point to cotton prices ruling firm in the coming season. First, domestic demand for cotton yarn is rising as consumption from user industries is picking up. Besides, prices of man-made fibres, such as polyester staple fibre and polyester filament yarn being linked to crude oil, are spiralling due to rising crude oil prices and rupee depreciation. The increase in price of man-made fibres has outpaced that of cotton in recent times. Hence, there could be a bias towards a higher mix of cotton in blended yarn and fabric, which in turn will keep demand for cotton strong.

Second, the government’s move to increase minimum support price (MSP) for 2019 will prevent cotton prices from falling, in any eventuality.

Third, sweeping changes in US-China trade tariffs may alter the demand-supply scenario for cotton in global markets. If imports of US cotton into China reduce due to the ongoing trade war, it may accelerate imports from India into China. A report by CARE Ratings Ltd says China will import around two million bales of cotton from India in the first quarter of the new cotton season. Domestic supply may be tight. Hence, cotton prices may rise by about 5-7% and average at about 130/kg for season 2019.

True, these developments augur well for farmers. But, if spinning mills are able to pass on the higher cotton prices to users, it may alleviate the burden of rising input costs. According to CARE Ratings, “FY2018 was a subdued year, with cotton yarn production growing marginally by about 0.1% y-o-y after declining by about 2% during the same period in the year before." However, the Southern India Mills’ Association was more optimistic about the current year, as mills had a better story on exports in the last few months.

If yarn demand continues to improve in domestic and export markets, they may weave a profitable year, in spite of higher prices. To some extent, the depreciation of the rupee gives a leg-up to exporting mills.

So far, large listed spinning mills such as Vardhman Textiles Ltd, KPR Mill Ltd and Ambika Cotton Mills Ltd have seen their margins improve in the last few quarters.

However, what may take a toll on profits, especially for smaller mills, is a higher working capital requirement when they procure cotton at higher prices at the start of the season. A true picture of mill prospects will be known only by early January as estimates for the 2019 season are in place. In any case, the higher MSP for cotton leaves little choice for mills. If cotton prices continue to be firm, then mills have to bank on higher yarn prices and sales to sustain profitability.

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