Forecasts of bigger crops and waning demand have pushed US cotton prices down 56% to $0.96/ pound (which converts to about Rs119/kg) from a record $2.197/pound (or Rs419/ kg) in March 2011. This price plunge is causing an irresistible urge to increase cotton imports, aver textile-makers in India, the world’s second largest cotton producer.
Textile firms such as Arvind, Alok, GTN, Ambika and Vardhman contribute significantly to India’s cotton imports. Many Indian textile-makers cater to global clientele who prefer cotton sourced from markets like the US, Australia and Egypt.
For, imported cotton offers finer counts and is contamination-free, a quality standard that Indian cotton fails due to lack of mechanisation at cotton processors. So, textile firms plan to use imported cotton to ramp up production of higher grade textiles.
The price scenario supports such a strategy. Home-grown cotton prices are hovering around `32,000 per candy/355 kg or Rs94/kg -- still lower than the international price of `119/kg; but, the gap could well narrow to about 10% or less shortly, after forex rate adjustments.
“With superior cotton now available at a 10% margin, Indian companies want to benefit from it by sourcing more,” said the top official of a leading textile company.
“Given its superior quality, US cotton enjoys customer demand in India and elsewhere. So, a difference of just 10% in prices would still make it a good deal,” said the top official of a leading integrated textile chain which plans to increase its cotton imports from the current 5% of its total consumption to 20%.
Dhiren Sheth, president of the Cotton Association of India (CAI), confirms the trend. “We expect manufacturers to import more in the coming months. We have seen a slight increase in cotton prices in India, though not a dramatic one.”
Besides offering superior cotton at competitive prices, imports lead to additional benefits like international credit (which is cheaper than domestic funding) and savings on carrying costs, Sheth said.
Linen-maker Himatsingka Siede, which has a plant in an import duty-free special economic zone (SEZ), will likely gain from greater flexibility as the import component in its source material could rise from 30% to 50%. “Though India is a major producer of cotton, pricing and availability are prone to changes in government policy and local conditions like availability of power,” said a company spokesperson.
GTN, too, could benefit as it imports cotton heavily. “Our strategy is to watch the comparative prices and, depending upon the demand from our customers for yarn, change import volumes,” said Umang Patodia, MD of GTN.
Such a strategy makes eminent sense for Indian firms, said IJ Dhuria, chief general manager of Vardhman Textiles. For, India imports around 2.5% of its total annual cotton consumption, whose worth would be close to $250 million.
An industry source said the frenzy among Indian textile firms for imported cotton will last only till the price differential is less than 10%.
“The moment international prices breach the 10% mark, Indian companies will go back to their old sourcing patterns.”
Dhuria agrees. “The current softening in global prices is due to a demand-supply mismatch As more and more Indian companies import cotton, global prices will appreciate due to the spurt in demand.”
Sheth of the CAI expects domestic cotton prices to stagnate at the current levels due to rising imports.