The Cotton squeeze!

Soaring cotton prices are spinning the spinners’ future out of control. Dipping cotton stock is adding to the woes. At this stage, a sharp drop in cotton prices is only a far cry, reveals an ITJ Exclusive Report.

Cotton has never failed in the last one decade to kick up controversies with various interests getting down to a tug of war trying to call the shots. The year 2006 is no exception. The sharp rise of over 35 per cent in domestic cotton prices since May 2016 is certain to squeeze ginners and spinners profitability by over 15 per cent, says India Ratings and Research (Ind-Ra). Add to this the fact that there has been a 7.4 per cent Y-O-Y fall in its production domestically at 35.2 million bales in Crop Year16, as per the Cotton Advisory Board estimates and globally by 18 per cent Y-O-Y to 98.1 million bales in CY16, as per the United States Department of Agriculture.

According to the report, the spike in cotton prices will adversely impact the profitability of pure cotton ginners and spinners due to their inability to pass on this steep increase to their customers, at once, due to decreasing cotton demand and increased competitiveness of manmade fibre. Cotton is facing fierce competition from manmade fibre, as it is a cheaper alternative and also since manufacturing manmade fibres has become more cost effective due to the decrease in crude prices since 2014.

In the last fiscal year of 2015-16, cotton production was an estimated 338 lakh bales of 170 kg each. The total supply of cotton was about 419 lakh bales including the opening stock of 66 lakh bales and imports of 15 lakh bales. Consumption of cotton was estimated at 308 lakh bales and cotton exports in 2015-16 was approximately 68 lakh bales. Exports of cotton from India have reduced from a level of over 100 lakh bales in 2013-14 to a level of 55-70 lakh bales in 2014-15 and 2015-16. The exports will gain momentum once the Chinese policy on cotton supply stabilises.

The skyrocketing cotton prices will impact small textile players the most, as cotton is their key raw material, and this would shrink their inventory holding capacity. Ginners and spinners are most likely to be affected, however, some organised spinning units with interchangeability from cotton to blended or manmade yarn, will be able to adapt. Also players which stocked up cotton at lower prices in March-April 2016 are better placed.

The spike in cotton prices is due to the 7.4 per cent yoy fall in its production domestically at 33.8 million bales (1 bale = 178 kg) in CY16, as per the Cotton Advisory Board estimates and 18 per cent yoy globally to 98.1 million bales, as per the United States Department of Agriculture. Further, the recent bad weather in the US’s cotton producing states is likely to lower production of cotton in the US in CY17. Hence cotton prices are likely to remain elevated globally in the near term.

Ind-Ra believes that despite the adverse impact of high cotton prices on the majority of the textile players, the textile industry’s overall contribution to the economy, would be affected only marginally.

José Sette, Executive Director, International Cotton Advisory Committee (ICAC), feels that the prices have firmed considerably since the beginning of June, but it is early to say that this situation will persist. “In a larger context, world stocks are still plentiful and sufficient to cover any shortfall in production,” he added.

Sette adds, “At the moment, the most important factor in enhancing the competitiveness of cotton is competitive pricing. In recent years, cotton prices have stayed above their long-term average, with few exceptions. Although growers may have benefited, high cotton prices have helped accelerate the trend for man-made fibers to occupy an increasing share of the market. Given that the prices of polyester, the main competing fiber, are likely to remain low as long as oil prices are at depressed levels, any increases in cotton prices may further damage the competitive position of cotton.”

Siddhartha Rajagopal, Executive Director, Texprocil, thinks that the rise in prices has affected many textile mills especially those that do not have stock of the raw material. He adds, “Due to this situation imports are likely to be more than the estimates as international cotton prices are lower than the Indian prices. Higher cotton prices hit production of cotton-based goods with a final impact on export of cotton-based textile goods.”

Speaking on the future trends, Rajagopal adds, “Within the cotton textile value chain, cotton ginning is a significant process as it is an interface between the farming and mill sectors. Ginning along with pressing is an important element in providing the final cotton to mills. With India now leading the world in cotton production there are investments also being made in this sector However, there is a need to modernise this sector and make it more competitive by producing cotton of international quality. Automation is the key to improving productivity of the gins and future investments need to be made to automate the process of ginning.”

“One of the factors that affect global cotton trade is the Chinese policy on cotton. China imports as well as exports a huge quantity of cotton but this year the decision was to offload its reserve stocks of cotton in the domestic market. This created a huge gap in the import requirement of raw material into China thereby causing a dip in the exports of other cotton producing countries like India,” says Rajagopal.

Sanjay K Jain, Jt. MD, TT Limited and President, Northern India Textile Mills’ Association (NITMA), says, “The current isolated spurt in Indian cotton prices has aggravated the situation to an extent that many can hear the death knell. The more disturbing fact is that no domestic yarn buyer is hassled or is rushing to buy yarn – they know cotton prices have moved 50 per cent and yarn just 20 per cent – still no anxiety! International buyers have diverted their orders as cotton in India has increased much much more in comparison to international cotton prices.”

He adds, “Indian spinners have been going through a very difficult time over the last two years despite cotton prices being reasonably low due to a demand supply imbalance created out of new spinning mills coming up in some states (viable due to incentives rather than fundamentals) and slow demand locally due to two successive poor monsoons and overall subdued sentiments in the globe. Exports have failed to cheer us up due to the disadvantage created by FTAs of our competitors with the big buying nations and we as usual not able to break any ice anywhere. Cotton yarn has suffered further as the Government felt that yarn needs no incentives. It’s true that yarn needs no more any investment incentives but it surely needs incentives to export. Requests went unheeded by the government from various Associations because they didn’t go into the details of demand – supply minutely or tried to understand the plight of spinning industry (though its classified as a stress industry by the Banking sector). The recent RBI Financial Stability report stated that textiles had the highest slippages from Standard Account to NPAs i.e. 8.8 per cent in 2015 and the way the industry is going 2016 is going to be worse.”

International cotton prices jumped to over 80 cents/lb in the second half of July 2016 from an average of 70 cents/lb for the rest of the season. Significantly lower crops in the five largest producing countries and higher than expected demand led to tighter stocks at the end of 2015-16, at which time world ending stocks were estimated to have fallen by 12 per cent to 19.7 million tonne. Stocks outside of China decreased by 9 per cent, to 8.4 million tonne, which is the lowest level since 2010-11, when they reached 8.3 million tonne. Furthermore, strong demand in China has reduced its national stocks by 12 per cent, to 11.3 million tonne.

Although world production is expected to increase in 2016-17, consumption is projected to remain stable at 23.9 million tonne. Mill use in China, the world’s largest consumer, is forecast to decrease by 3 per cent, to 7.1 million tonne, due to high cotton prices, low polyester prices, and limited imports. However, mill use may stage a modest recovery in India and Pakistan, where consumption is projected to increase by 2 per cent, to 5.3 million tonne, and by 1 per cent, to 2.2 million tonne, respectively.

Impact of rising cotton prices

With market analysts predicting that cotton prices are unlikely to fall until the next season that starts in October, textile mills in Coimbatore are taking desperate measures like reducing production and raising prices of hosiery yarn. Though the State Government does not have a role to play in cotton pricing, they say that reducing taxes as per their earlier demands will go a long way in this situation.

Domestic cotton prices, especially the preferred Shankar-6 variety, have risen from 34,000 per candy (355 kg of cotton) in April to 49,000 per candy by July-end. According to Ind-Ra, prices of cotton are unlikely to come down till October, when the new season begins for cotton. As a result, textile mills in the state, which account for 46 per cent of the spinning capacity in the country, preferred to bring down production by 15 per cent to 20 per cent, to at least cut their losses.

The textile industry accepts that the state government cannot play a role in stabilising or bringing down cotton prices, but say they can take many long-term and short-term measures to help the industry tide over the current crisis and prevent it in the future.

For the textile industry here, hike in cotton prices in two months is having an impact on the competitiveness of the entire textile value chain and hence, the industrial associations have sought measures by the Textile Ministry to stabilise cotton prices. Southern India Mills’ Association (SIMA) Chairman M Senthil Kumar said the mills want the Indian cotton prices to be on a par with international prices throughout the year. The prices should be stable. When the prices increase suddenly, the entire value chain is affected for about four months in a year.

The South India Spinners’ Association had appealed to the Minister that Cotton Corporation of India, which purchases cotton at minimum support price, should sell the cotton only to small and medium-scale textile mills. According to Prabhu Damodaran, secretary of Indian Texpreneurs Federation, one of the main factors that will help textile mills take the right decision on raw material purchase is accurate data on cotton. All the data available now is based on inputs from different sources. Hence, handy meters should be attached to ginning machinery that will register the data on the cotton pressed. This can be compiled by the Textile Commissioner’s office and released to the industry at regular intervals. Similarly, efforts should be taken to have satellite data on cotton production. The Cotton Corporation should purchase 30 per cent to 35 per cent of the cotton produced in the country and sell it to the mills regularly. This will bring down speculation in the market, he said. The SIMA also sought extension of the special package (for Rs 6,000 crore), which was announced for the garment sector, to the made-ups segment. It said that since the disparity in cotton and yarn prices is bringing down the profitability of mills, the Government should give incentive such as interest subvention for yarn exports. Since spinning capacity in the country has increased over the years, the hank yarn obligation for each mill should be reduced from 40 per cent to 20 per cent.

Successful implementation of government measures towards increasing the focus on and the demand for ready-made garments and handloom products in domestic as well as international markets, will lead to exports of more value added products with higher realisations and profitability. This is in contrast to the exports of the commodity products of raw cotton and yarn, which constitute the majority of exports, as of now.

Competitive cotton pricing vital to sharpen competitive edge: Sette

The International Cotton Advisory Committee (ICAC) is an association of governments of cotton producing, consuming and trading countries which acts as the international commodity body for cotton and cotton textiles. José Sette, Executive Director, ICAC, provides some suggestions to boost production and consumption of cotton internationally.

Excerpts…

With cotton prices hardening in India, spinners are up in arms. What is the situation globally on the price front for this year?

Prices have firmed considerably since the beginning of June, but it is early to say that this situation will persist. In a larger context, world stocks are still plentiful and sufficient to cover any shortfall in production.

Cotton production is likely to decline and which are countries likely to suffer or get affected by this trend?

A long-term declining trend in Chinese cotton production outside of Xinjiang can be seen, but trends in other countries are more difficult to discern.

Overall, cotton production is very responsive to price signals, so changes in other countries will depend on the evolution of prices.

What are your suggestions to boost production and consumption of cotton internationally?

At the moment, the most important factor in enhancing the competitiveness of cotton is competitive pricing. In recent years, cotton prices have stayed above their long-term average, with few exceptions. Although growers may have benefited, high cotton prices have helped accelerate the trend for man-made fibres to occupy an increasing share of the market. Given that the prices of polyester, the main competing fibre, are likely to remain low as long as oil prices are at depressed levels, any increases in cotton prices may further damage the competitive position of cotton.

Possible bans of cotton exports being discussed in some countries are likely to exacerbate price volatility and have a negative effect on demand.