The Hindu Business Line : Slowdown, firm $ driving down cotton prices

Mumbai, Nov. 6 The month of October that witnessed an unprecedented price collapse in a range of commodities did not spare cotton. Notwithstanding market fundamentals that favour relatively high prices, global economic slowdown, loss of business confidence, financial market turmoil and firming dollar combined to drive the cotton market down.

Global cotton mill use is projected to decline by 3 per cent in 2008-09 to 25.5 million tonnes, the International Cotton Advisory Committee (ICAC) said, adding that mill use in China is expected to decline by 4 per cent to 10.5 million tonnes (mt) due to rising production costs, the strength of the yuan against the dollar and slowing demand from textile importing countries.

World cotton production is set to decline by 6 per cent in 2008-09 to 24.7 mt due to lower acreage, especially in the US, while smaller crops are expected in Turkey, Brazil and Egypt, the ICAC pointed out. Higher crop in India, Pakistan and Australia is unlikely to offset global crop decline.

Due to declining mill use, world cotton imports are forecast to decline by 6 per cent in 2008-09 to 7.8 mt. Imports by China are expected to decrease by 10 per cent to 2.3 mt.

Strong upside risk

Although there is gloom at present, the situation is fraught with possibilities. Despite anticipated decline in consumption, world stocks are likely to be drawn down further, and production during 2008-09 would trail consumption by close to a million tonnes. This market condition holds a strong upside risk to prices and speculators thrive on such conditions. It is only a matter of time before speculators return to this market at which point of time prices may be expected to begin to rally from current levels.

Sentiment subdued

An additional factor for depressed prices is the ongoing harvest and arrivals in major origins. This is particularly true for India. Arrival pressure and lack of robust export order-book is likely to keep the sentiment subdued until February next year. The mood may change there after.

A further reduction in the US cotton acreage next year is also likely to be a reality.

Talks about acreage reduction would begin by February/March 2009 which would boost the world market.

The ICAC has forecast season-average Cotlook A-Index at 73 cents a pound; but believes the index may actually be in the lower half of the 95 per cent confidence interval, between 64 and 73 cents a pound.

Dollar impact

The emerging situation can play out slightly differently. A major factor that would begin to affect commodity prices is the dollar.

After three years of depreciation against the euro, the dollar is currently enjoying a strong run. In addition to several factors, a strong dollar has dragged commodity prices down.

The currency will sooner, rather than later, will have to reverse direction and begin to weaken.

It could happen sometime towards the end of the first quarter of 2009, according to foreign exchange strategists. Should that materialise, commodities across the board including cotton would get a price lift. On current reckoning, notwithstanding the current poor sentiment in the world cotton market, there is hope things may improve in about three months or so. As major consumers draw their stocks down, replacement demand will have to emerge. In India, a sharp hike in the minimum support price has upset textile mills, exporters and traders. The Cotton Association of India has pleaded for a consultative review of the MSP. Pending that, the onus is on Cotton Corporation of India and the Maharashtra Cotton Federation to step up procurement and support prices. Arrivals are likely to remain heavy during December and January after which they will begin to taper off.