The Hindu Business Line : Cotton import duty removal to benefit spinning cos

Stocks of cotton textile companies rallied on Wednesday on the back of the removal of import duty on cotton prices. The move could help ease cotton supply situation, which has been tight due to increasing exports of cotton from the country. Cotton spinning companies such as Ambika Cotton, Super Spinning Mills and Vardhman Textile would witness some relief on the raw material front. Cotton accounts for almost 60 per cent of the total raw material input for spinning companies.

Cotton prices have been on the rise globally on strong demand from China.

Prices in the country have, however, jumped particularly sharply due to an unprecedented rise in exports. Improving yields have dramatically boosted cotton production situation. With supply exceeding local demand, exports have been on the rise in the last couple of years. Exports in 2007-08 are at an estimated 8.5 million bales in 2007-08, as against an earlier estimate of 6.5 million bales.

This has tightened supplies to the local mills, which source most of their cotton domestically. Cotton prices in the country have appreciated 40 per cent in 2008.

Relief on margins

Raw material cost as a percentage of sales has increased by 600-700 basis points on an average in the March 2008 quarter for spinning mills, which have been unable to recover the higher cotton costs from realisations on yarn. However margin pressures could start to ease as more mills resort to imports of cotton and increase their cotton inventories.

The removal of import duty on cotton (14 per cent till now) might prompt more mills to start importing cotton, depreciating rupee notwithstanding, as local cotton prices are at a significant premium to that of neighbouring countries (Some varieties of cotton are at more than a 30 per cent premium).

The threat of duty-free imports could also help cool prices domestically.

Other factors that could help lower cotton prices include a good monsoon and slowing demand for cotton from China.