Near-term prospects of cotton spinning mills look bleak. With falling acreage of cotton in India and easing global demand for yarn, the differential in prices between domestic and overseas markets is an additional challenge.

Cotton prices fell 18% in international markets in the past fortnight, but domestic prices, which normally follow suit, have so far fallen only 5%. Perhaps, news of lower cotton acreage and decade-low productivity in the current season is keeping prices elevated. The Cotton Advisory Board of India’s estimate of cotton output of 343 lakh bales (one bale is equal to 170 kilograms) for cotton season (CS) 2019 is lower than the year-ago figure, which itself was a 12-year low.

Also, the increase in minimum support price for cotton — medium and long staple — by 2% and 1.8% for FY20, respectively, will support prices. Analysts say cotton imports in FY20 will therefore, rise.

As such, news over the last two days about a drop in yarn production across 50-60% of mills in the south and north is not surprising.

To be sure, large mills may be able to import cheaper cotton from international markets. However, small- and medium-sized spinners are facing multiple challenges. Lack of easy access to working capital and letter of credit facilities, and inventory holding costs make it tough for them to import cotton. Most of them carry two-three months inventory and may not be in a position to buy more from global markets.

Moreover, yarn off-take 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 to half the levels in February." Domestic demand is ebbing, too, unless the forthcoming festival 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 face duty and that makes it tough to compete, given stiff competition from Vietnam.

In other words, high domestic cotton prices, poor liquidity and weak consumption by textiles pose a threat to profit margins of mills going forward. This is a far cry from the previous two years when yarn mills were cushy with stable global cotton prices through cotton season (CS) 2018 and 2019.

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, even though they are more resilient compared to smaller unlisted spinners.