Textile sector uncertain over cotton prices

Raw cotton prices have been at an all time high for a while now.
While the rise in raw material prices is being passed on to the end customers, untimely rains, rumours over export policy and weak cotton futures has led to a great amount of uncertainty across the value chain.

In the last three months, cotton prices have been rallying at an all time high. Last year, at the start of the cotton season in October, cotton prices were at around Rs28,000 per candy, which stabilised at around Rs30,000-32,000 per candy until August 2010. However, it rose in August 2010 and has been on an upward trend since then.

At present, raw cotton prices are in the range of Rs42,000-43,000
per candy.

Most industry officials point out the central government’s decision to allow cotton exports is one of the main reasons for high cotton prices. Players thus expect a price correction post December 15.
This year, the government has allowed cotton exports of around 55 lakh bales upto December 15.

“As the exports have started, cotton prices for the type Shankar 6 has again shot up to around Rs44,000 per candy. However, once the exports end on December 15, we expect the prices to stabilise,” said Sunil Khandelwal, CFO, Alok Industries Ltd.

While, the end of the export period is expected to bring some stability in raw cotton prices, expectations on extension of the export period has already become a concern in the textile segment.

“Post December 15, when the exports come to an end, the situation will improve. If the government does not announce any extension or increase policy for cotton exports, cotton prices will crash by more than 15% as the availability of cotton will improve,” said IS Dhuria, corporate general manager (raw materials), Vardhman Textiles.

Amid this uncertainty about the way forward for raw cotton prices, there is pressure building on the international cotton prices.
Cotton futures for March delivery fell by the exchange limit of 6 cents, or 4.6%, to settle at $1.2315 a pound on ICE Futures US in New York. This week, the fibre dropped 8.2%, the most since February 2009, Bloomberg reported on November 19.

Srinivas Kodali, executive director, Priyadarshini Spinning Mills Ltd says that for some time, the domestic cotton prices have moved in tandem with the US cotton futures.

US cotton futures have been under pressure due to uncertainty over the Chinese economy.

Surprisingly, domestic prices have not witnessed a similar downtrend. He expects domestic cotton prices will stabilise at around Rs40,000 per candy in January next year, as major cotton supply would arrived by then.

Along with prices, availability of good quality cotton has also turned into a major concern for textile players.

“Untimely rains at some centres have become a matter of concern as it has slowed down arrivals,” said Paritosh Agarwal, MD, Suryalakshmi Cotton Mills Ltd.

Dhuria said the rains have also affected yield in regions such as Maharashtra, Gujarat and Coastal Andhra Pradesh.

“Ginners are finding it difficult to process this cotton (with high moisture content), which in turn will affect availability of good quality cotton in the market,” said Srinivas.