Cotton & MMF – Outlook 2020

After registering a decline of about 9 per cent in cotton season (CS) 2018-19, India’s cotton production is likely to witness a double-digit growth of about 16 per cent in CS 2019-20 with production at 6.6 billion kg during the year on back of favourable monsoon as well as increased MSP that led to increased cotton crop sowing. For CS20, the acreage under cotton is estimated to have marginally increased by about 1.3 per cent to 12.8 million hectares.

Cotton prices (S-6 & J34) during the year remained largely stable witnessing an increase of about 2-4 per cent on back of increased MSP despite weak demand after remaining range bound during domestic CS18 at about Rs 118 per kg on account of subdued demand from the spinners. Also, low and uneven rainfall along with loss of crop due to pink bollworm attacks in Maharashtra and Karnataka kept the supply in the domestic market tight during the year. Domestic cotton consumption increased only marginally by about 1 per cent YoY mainly by mills. In FY19, however, exports demand witnessed an improvement led by demand from Bangladesh, Vietnam, Pakistan and Sri Lanka. Exports to China remained strong as well.

Going forward, as per International Cotton Advisory committee (ICAC), on back of falling stockpiles in China despite marginally higher production in CS20, cotton imports are expected to witness a marginal uptick from China during the year. However, China’s cotton and cotton yarn imports from India are expected to remain under pressure as China has entered phase II of free trade agreement with Pakistan, which competes directly with Indian yarns and fibres. In July 2019, MSP for cotton – medium and long staple has been further increased by 2 per cent and 1.8 per cent for FY20 and currently stand at Rs 5,255 per quintal and Rs 5,550 per quintal respectively. However, going forward, prices are expected to remain range bound and average at about Rs 124 to 127 per kg for CS20 despite increased MSP due to higher production amidst subdued demand.

Cotton yarn production is expected to remain largely stable at current levels and increase only marginally by about 1.5 to 2.5 per cent to reach 4,200 to 4,250 million kg in FY20, on back of increased availability of cotton at lower prices and higher demand from Bangladesh and Vietnam despite subdued domestic demand. Also, 100 per cent blended and non-cotton yarn production is expected to witness a stable growth of only about 2 to 4 per cent to 1,710 to 1,740 million kg on the back of expectations of y-o-y lower crude oil as well as substitute cotton prices in the domestic market.

Production

Cotton: In CS19, India’s production stood at 5.6 billion kg, lower by about 9 per cent on a YoY basis on account of scarcity of water led by uneven and inadequate rainfall in key cotton-producing states during the year. Also, some cotton crop was destroyed during the season due to increase in incidents of pest attacks in Maharashtra and Karnataka leading to lower yields. It should also be noted that the acreage under cotton during the CS19 witnessed a negligible increase of about 0.2 per cent to 12.6 million hectares vis-à-vis an increase of over 16 per cent during CS18. For CS20, the acreage under cotton is estimated to have increased by about 1.3 per cent to about 12.8 million hectares while the production is estimated to register a sharp increase of about 16 per cent YoY to 6.6 billion kg.

MMF: The domestic MMF industry mainly consists of two components, polyester and viscose, which together accounts for about 94 per cent (in volume terms). Under this, polyester accounts for about 77.5 per cent while viscose accounts for the remaining share. MMF is primarily used to produce 100 per cent non-cotton fabrics and blended fabrics, which are in turn used in readymade garments, home textiles and other industrial textiles. In FY19, MMF production stood at 2.6 billion kg, witnessing an increase of about 3.7 per cent y-o-y after declining about 0.7 per cent in FY18. In FY20 (April-August), production stood at 1.14 billion kg, registering a growth of about 5.7 per cent YoY led by an increase of over 7.6 per cent in the production of filament yarn and about 4.3 per cent growth in the production of staple fibre during the period.

Cotton prices

World: World cotton production is projected to be higher than its consumption in CS20, after being lower for the last four years in a row. This is expected to stabilise and bring down prices marginally that were on a rise in the last few years. Production in two key countries; India and USA declined during CS19 on a YoY basis is expected to lead to the shrinking of stock piles in the world. This supported the rise in price during the period in the world market keeping them largely range bound at US 87 to 88 cents per pound after increasing by about 5.5 per cent YoY during CS18 on account of lower demand from China, world’s largest cotton consumer, despite depleting stock piles. Also, increased demand from China has restricted the availability of the fibre globally putting pressure on the prices in CS19.

Domestic: Domestic cotton prices (S-6 & J34) increased by about 2 to 4 per cent in CS19 (October 2018 – September 2019) on a YoY basis on the back of increased MSP for cotton despite weak demand after remaining range bound during domestic CS18 at about Rs 118 per kg on account of subdued demand from the spinners. Prices witnessed an increase of about 2 to 4 per cent YoY and averaged at Rs 121.3 per kg in the domestic market CS19 lead by increased MSP. Also, low and uneven rainfall along with loss of crop due to pink bollworm attacks in Maharashtra and Karnataka kept the supply in the domestic market tight. However, in CS20, the production is estimated to increase by a sharp 16 per cent YoY, easing the supply constraint and thereby marginally softening the domestic prices.

Going forward, on back of falling stockpiles in China despite marginally higher production in CS20, cotton imports are expected to witness a marginal uptick from China during the year. However, China’s cotton and cotton yarn imports from India are expected to remain under pressure as China has entered phase II of free trade agreement with Pakistan, which competes directly with Indian yarns and fibres. In July 2019, MSP for cotton-medium and long staple has been further increased by 2 per cent and 1.8 per cent for FY20 and currently stand at Rs 5,255 per quintal and Rs 5,550 per quintal respectively. However, despite increased MSP, we expect prices to remain largely range bound and average at Rs 124 to 127 per kg for CS20 led by higher production and subdued demand. Also, YoY lower crude oil price is expected to keep the substitute (MMF) prices stable during the year.

Typically new crop prices are always higher despite the increase in supply in the market for a month or so. Subsequently it increases further or drops depending on the daily arrivals and demand from spinners. When arrivals increase in the market, prices fall subsequently and spinners purchase in bulk (two to three months inventory) which leads to subdued demand in following months. Purchasing is completed by March or latest by April-May.

PSF and PFY prices witnessed a double-digit increase of about 21.9 per cent and 14.7 per cent respectively on a YoY basis in FY19, while cotton prices witnessed a growth of about 6.8 per cent (S-6) and 9.2 per cent (J-34) y-o-y during the same period. MMF prices witnessed a higher increase on back of higher crude oil prices in the country. Crude oil prices registered a growth of about 21.5 per cent YoY in FY19 vis-à-vis a growth of about 15.7 per cent during the corresponding period previous year. PSF and PFY prices averaged at Rs 124 and Rs 116 per kg respectively, as of FY19 period.

The VSF prices are dependent on prices of wood pulp. VSF prices have consistently witnessed a stable CAGR growth of about 6.3 per cent between FY15 and FY19. The high CAGR is also on account of FY18, where prices witnessed a sharp growth of about 11 per cent. The prices of VSF are also driven by the availability and prices of the other fibres and the energy cost. At the end of FY19, the VSF prices averaged at Rs 197 per kg and prices of VFY are at Rs 370 per kg in the domestic market.

Yarn Production

After remaining largely range bound in FY18, cotton yarn production in India registered a growth of about 3 per cent YoY in FY19. Cotton yarn production stood at 4,182 million kg during FY19. Overall export demand for cotton yarn remained strong during the FY19 period on account of high demand from China coupled with competitive cotton prices in the international market.

However, domestic yarn demand continues to be sluggish with substitution taking place from MMF. During H1 FY20, cotton yarn prices (cotton hank yarn 40s) witnessed a marginal uptick of about 2.7 per cent y-o-y and averaged at Rs 274.7 per kg on back of increased raw material prices in the market. However, yarn demand for the Indian players remained subdued in the export market, during H1 FY20 owing to higher domestic cotton prices compared to the world cotton prices. Also, demand from China remained weak on back of free trade agreements with Pakistan, which competes directly with India’s cotton yarn. Blended and 100 per cent non-cotton yarn demand has consistently been witnessing an upward trend in the last five years registering a CAGR growth of about 4 per cent between FY15 and FY19, with an exception of FY18, where crude oil prices witnessed a sharp increase of over 18.5 per cent on a YoY basis leading to higher feedstock PTA and MEG costs. Production stood at 1,680 million kg in FY19, a YoY growth of about 4 per cent. In FY20 (April-August), production of blended and 100 per cent non-cotton yarn stood at 710 kg, registering an increase of about 2.2 per cent YoY.

PTA is a key raw material component in the polyester value chain and reacts with Mono Ethylene Glycol (MEG) in the process of continuous polymerisation for producing polyester. For production of every 1 MT of polyester melt, produced via the process of continuous polymerisation, 0.86 MT of PTA is required. The largest application for PTA is in Polyethylene Terephthalate (PET) for the polyester industry to produce industrial and textile fibres, PET bottles and film and moulded product applications. The PTA industry is a highly organised industry, with Reliance (approximately 70 per cent), Mitsubishi (approximately 21 per cent) and IOCL (9 per cent) being the only PTA manufacturers in India.

PTA production in India has largely remained stable at average of about 3,500 thousand tonnes over the last five years. Demand for PTA is driven by the textile and beverages sector. Earlier during FY14-FY15, with increasing consumption of PTA, the demand was met by imports, but with the expansion of capacities by manufacturers in India, the share of imports in the PTA industry declined over the years.

The MEG industry is a highly organised industry, with Reliance Industries, India Glycols and IOCL being the only MEG manufacturers in India. The MEG production in India has remained largely stable at around 900 to 1,100 thousand tonnes during FY15 and FY19. It registered a CAGR growth of about 6 per cent between FY15 and FY19 from 923 thousand tonnes to 1,160 tonnes in FY19. Imports had been consistently increasing till FY17, however, in FY18 and FY19, imports declined by about 13.7 per cent and over 40 per cent y-o-y respectively on back of higher domestic production and subdued demand. Imports registered a decline of about 9 per cent CAGR between FY15 and FY19 while consumption recorded a slower 4.2 per cent CAGR during the period. Exports, however, has witnessed a significant increase of over 40 per cent between FY15 and FY19.

Prices

The main raw materials of polyester are purified terephthalic acid (PTA) and mono ethylene glycol (MEG). Costs of these petrochemical derivatives are largely subject to volatility in crude oil prices. The prices in the last two years have increased sharply on back of rising crude oil prices. However, in FY19, with over 21 per cent higher crude oil prices, PTA prices witnessed a sharp increase of over 28 per cent YoY on back of lower production while MEG prices registered a decline of over 5 per cent YoY on back of about 2.4 per cent higher production amidst 27 per cent decline in consumption on a y-o-y basis.

During FY19, about 35 to 40 per cent of the total cotton yarn were to China (465 MT), followed by about 18 per cent to Bangladesh (225 MT), about 5 per cent to Pakistan (61 MT) and Egypt (58 MT) each and about 3 to 4 per cent to Vietnam (43 MT). India imports only about 5 to 7 MT of cotton yarn primarily from China, Vietnam, Indonesia and Sri Lanka.

Cotton yarn demand & price

Demand: Cotton yarn demand in India remained sluggish during the FY19 at 2,933 million kg registering a decline of about 1.4 per cent YoY after increasing by about 3.9 per cent during the same period last year. However, export demand witnessed a strong double-digit growth of 14.7 per cent YoY and stood at 1,261 million kg after declining by about 8.8 per cent during FY18. China and Bangladesh together account for about 55 per cent of India’s total cotton yarn exports followed by Pakistan, Egypt and Vietnam that account for 5 per cent, 4.5 per cent and 3.5 per cent respectively as of FY19.

The overall domestic textiles industry is on the path of revival with the effects of goods and services tax (GST) implementation in July 2017 now fading. In FY19, on back of higher crude oil prices (21.5 per cent higher YoY); demand for MMF witnessed marginal slowdown. Going forward, cotton yarn production is expected to remain largely stable at current levels and increase only marginally by about 1.5 to 2.5 per cent to reach 4,200 to 4,250 million kg in FY20, on back of increased availability of cotton at lower prices and higher demand from Bangladesh and Vietnam despite subdued domestic demand. Also, 100 per cent blended and non-cotton yarn production is expected to witness a stable growth of only about 2 to 4 per cent to 1,710 to 1,740 million kg on the back of expectations of y-o-y lower crude oil as well as substitute cotton prices in the domestic market.

With the industry now stabilising post the demonetisation and the implementation of the goods and service tax (GST) regime, the demand from downstream industry – apparels and made-ups, has started to marginally pick up in the last few months and is expected to witness a growth of about 10 to 12 per cent YoY in FY20 on back of rise in disposable income, increased usage of plastic money leading to impulsive buying among the Indian consumers. In terms of exports, with increased demand from major importing country China (demand increased by a sharp 47 per cent YoY in FY19 after declining by over 30 per cent during FY18), cotton yarn exports are likely to continue register an uptick going forward. However, Vietnam continues to be in a better position to serve the Chinese yarn demand since last few years as exports from India to China attract a 3.5 per cent duty, while Vietnam has duty-free access to Chinese markets. Also, Chinese yarn manufacturers have set up their operations in Vietnam for free flowing trade activities. Despite this, India is expected to continue being the largest exporter of cotton yarn in the world.

Cotton yarn prices do not move in tandem with the cotton prices alone, i.e., the coefficient is not significant. Similarly for PSF prices, while PTA shows significant coefficient, MEG does not, therefore it can be concluded that prices alone do not determine the yarn or fibre prices and demand, inventories and supply conditions continue to have a significant impact on the prices.

Going forward, with crude oil prices expected to moderate in FY20 on back of ever increasing US oil production; overall weak world economy on back of on-going trade wars, the substitute manmade fibre (MMF) prices are expected to be competitive in the domestic as well as international markets. Hence, Care Ratings’ expects the demand for cotton yarn to improve only marginally by about 3-5 per cent y-o-y during the upcoming season. In FY19, cotton yarn prices (40’s count) increased only by about 3.8 per cent YoY to Rs 270 per kg despite an increase of about 6 to 9 per cent in cotton prices during the same period on account of weak domestic demand. Similarly, during CS19, cotton yarn prices increased only marginally by about 2 per cent to Rs 272 per kg while input material cotton price witnessed an increase by about 4 to 5 per cent during the same period.

However, cotton yarn demand will be closely monitored due to China’s cotton policy and diminishing stockpiles as well as volatile crude oil prices that impact the prices of its substitute – manmade fibres (synthetic yarns).

Profitability

Cotton yarn prices (cotton hank yarn – 40s) witnessed slower growth of about 3.8 per cent YoY in FY19 after increasing by over 7 per cent for the last two years. However, prices have started recovering on a month-on-month basis after witnessing stable growth for last few months with a growth in cotton prices. Also, polyester fibre and yarn prices have witnessed higher growth of about 18 per cent in FY19 while polyester blended yarn prices have witnessed only a marginal growth of about 7.4 to 7.5 per cent YoY during the same period. Therefore, despite stable cotton and MMF prices, operating margins of the spinners will continue to remain under pressure in the short to medium term till the demand in the domestic market picks up considerably for cotton and blended yarn. Also, on back of slower movement in yarn demand, the utilisation rates of the domestic spinners is expected to be lower which will put further pressure on the margins.

Cotton yarn prices are highly volatile due to volatility in the demand (depending on price of the substitute – synthetic yarn), which is majorly impacted by exports of cotton and cotton yarn. Also, any fluctuation in crude oil impacts the prices of the substitute man-made fibres and yarn. India exports around 15 to 20 per cent of cotton and 30 to 40 per cent of cotton yarn. Therefore, even a minute change in the exports demand supply scenario significantly impacts domestic prices and thereby the margins of the yarn spinners.

Major policies announced

• As of August 2018, the Government has increased the basic custom duty to 20 per cent from 10 per cent on 501 textile products, to boost Make in India and indigenous production
• The Government of India announced a Special Package to boost exports by $31 billion, create one crore job opportunities and attract investments worth Rs 80,000 crore ($11.9 billion) during 2018-2020. As of August 2018 it generated additional investments worth Rs 25,345 crore ($3.8 billion) and exports worth Rs 57.3 billion ($854.4 million)
• The Government of India has taken several measures including Amended Technology Upgradation Fund Scheme (A-TUFS), scheme is estimated to create employment for 35 lakh people and enable investments worth Rs 95,000 crore ($14.2 billion) by 2022
• Integrated Wool Development Programme (IWDP) approved by Government of India to provide support to the wool sector starting from wool rearer to end consumer which aims to enhance the quality and increase the production during FY18 to FY20.
• The Cabinet Committee on Economic Affairs (CCEA), Government has approved a new skill development scheme named ‘Scheme for Capacity Building in Textile Sector (SCBTS)’ with an outlay of Rs 1,300 crore ($202.9 million) from FY18 to FY20.
• The government extended 2 per cent interest subsidy for modernising spinning machines that are over 15 years old
• 10 per cent capital subsidy for all new machines for the weaving and garmenting sector, 5 per cent interest subsidy for common effluent treatment plant, 15 per cent capital subsidy for the individual ETP and Rs 1 crore R&D assistance for ETP
• The Government has increased the basic custom duty to 20 per cent from 10 per cent on over 500 textile products, to boost indigenous production and the Make in India programme
• The Government announced a special package to boost exports by $31 billion, create one crore job opportunities and attract investments worth Rs 80,000 crore during 2018-2020. In March 2019, the Central Government approved a scheme to rebate State and Central Embedded Taxes for apparels and made-ups exports

Outlook 2020

• Going forward, on back of falling stockpiles in China despite marginally higher production in CS20, cotton imports are expected to witness a marginal uptick from China during the year. However, China’s cotton and cotton yarn imports from India are expected to remain under pressure as China has entered phase II of free trade agreement with Pakistan, which competes directly with Indian yarns and fibres.
• In July 2019, MSP for cotton, medium and long staple has been further increased by 2 per cent and 1.8 per cent for FY20 and currently stand at Rs 5,255 per quintal and Rs 5,550 per quintal respectively. However, going forward, prices are expected to remain range bound and average at about Rs 124 to 127 per kg for CS20 despite increased MSP due to higher production amidst subdued demand.
• Cotton yarn production is expected to remain largely stable at current levels and increase only marginally by about 1.5 to 2.5 per cent to reach 4,200 to 4,250 million kg in FY20, despite high cotton prices and subdued domestic demand, on back of higher demand from Bangladesh and Vietnam. Hundred per cent blended and non-cotton yarn production is expected to witness a stable growth of about 2 to 4 per cent to 1,710 to 1,740 million kg on back of expectations of YoY lower crude oil prices as well as marginally higher prices of substitute cotton in the domestic market
• Operating margins of the spinners will continue to remain under pressure in the short to medium term till the demand in the domestic market picks up considerably for cotton and blended yarn
• However, cotton yarn demand will be closely monitored due to China’s cotton policy and diminishing stockpiles as well as high crude oil prices that impact the prices of its substitute – man-made fibres (synthetic yarns).

Courtesy: Industry Insights | Cotton & MMF Update – December 2019 report from CARE Ratings

Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report The article is authored by Darshini Kansara, Deputy Manager – Industry Insights. She can be contacted at: Darshini.kansara@careratings.com or +91-22-6754 3679.