Agri Business

As cotton prices soar, spinning mills feel the heat

Subramani Ra Mancombu Chennai | Updated on August 14, 2021


Spinners unable to raise yarn prices as demand is yet to pick up

Spinning mills in the country are facing a tough time as they are unable to raise cotton yarn rates despite cotton prices soaring in domestic and global markets.

“We are unable to raise the prices of yarn since the demand has not picked up as expected. The movement is dull,” said K Selvaraju, Secretary-General, Southern India Mills Association (SIMA).

“Yarn movement is a little slow globally too due to Covid restrictions in countries such as Vietnam,” said Anand Poppot, a Rajkot-based trade of raw cotton, yarn and spinning waste.

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“The prices of yarn in the domestic and international markets are almost at par. However, there is a sudden increase in cotton prices due to a large quantity of cotton being exported by the Cotton Corporation of India,” said OP Gulia, Chief Executive Officer, SVP Group that has mills in Rajasthan and Oman.

‘Unsustainable realisations’

“Cotton yarn realisations touched an all-time high in June 2021 and moderated marginally in July 2021 despite the increase in cotton prices. ICRA believes that the cotton yarn realisations are unsustainable at current levels,” said Nidhi Marwaha, Vice-President and Sector Head, Corporate Ratings, ICRA Ltd.

Cotton prices on the Inter Continent Exchange for October delivery closed at 93.89 US cents a pound (₹55,150 per candy of 356). In India, the comparable export variety Shankar-6 variety is sold at ₹57,000-57,200 a candy. On the Multi Commodity Exchange, cotton for October delivery ruled at ₹26,390 per 170-kg bale (₹55,263 a candy).

Selvaraju said it is normal for domestic cotton prices to rule above global prices at this time of the year since growers and ginners would have low inventories. “But this year, cotton is available with private traders, particularly multinationals and our ending stocks will be higher. Spinning mills usually import 5-10 lakh bales of cotton during the time of sparse arrivals but even that is now a problem as the Centre has imposed 10 per cent customs duty,” he said.

Import duty

In the Budget presented in Parliament this year, Finance Minister Nirmala Sitharaman imposed the duty on cotton imports. It has not gone down well with the textile industry, especially since it requires extra long staple (ELS) cotton from the US and Egypt for fine fabrics.

India’s ending stocks for the current cotton season to September is expected to be lower than 75 lakh bales, though the Committee on Cotton Production and Consumption (CCPC), a body comprising all stakeholders including the government, has estimated the stocks to be 97.95 lakh bales. The Cotton Association of India (CAI), a body of traders, had projected the ending stocks at 94 lakh bales.

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The ending stocks this season are expected to be lower than last season’s 120.95 lakh bales. The ending stocks were higher last fiscal as consumption by mills was affected due to Covid.

Ending stocks are expected to be lower than last year’s record despite higher production this season. The CCPC has pegged the output this season at 371 lakh bales and the CAI at 356 lakh bales. However, higher exports of 74 lakh bales till now against 50 lakh bales the whole of last season have also helped to reduce the stocks.

“This (domestic cotton prices ruling higher than global rates) is in line with the trend seen during the non-harvest months (April to September) as limited fresh stocks arrive in the market. As most players stock or book cotton during the harvest season, the recent increase in cotton prices is unlikely to be the driving factor for cotton yarn realisations or profitability,” said ICRA’s Marwaha.

Units start operations

Poppat said export prices of yarn have dropped a tad but the more serious problem was availability of vessels to despatch the consignments. “This has resulted in a hand-to-mouth situation for the textile industry abroad,” he said.

But SVP’s Gulia said the situation is much better now. “The looms and garment manufacturing units have started operations and there is demand for yarn across the horizon. The international market is also picking up,” he said.

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Marwaha said a healthy recovery is seen in demand and sales like last year. “Moreover, the impact of the second wave on performance of downstream companies has not been as severe as last year, as the lockdown restrictions were more focused and regional this time around vis-à-vis nation-wide lockdowns last year,” she said.

Besides, pent-up demand, ongoing vaccination drive, better export demand prospects for downstream players (with opening of key markets like the US and the EU) and better preparedness for Covid protocols by the downstream players are also contributing to a healthy recovery in demand for the spinners, she said.

Quick recovery

The domestic demand is likely to witness a quick recovery unlike last year, though it is marginally lower than the pre-covid levels currently, Marwaha said.

SVP Group’s Gulia said the textile sector is recovering well after the second wave of Covid-19 pandemic. “Lockdowns have been relaxed, retail stores are opening up, people have got vaccinated and manufacturing units are functioning at full capacity again,” he said.

The festive season is approaching and the probability of a third wave is doubtful, he said, adding that demand for use-and-throw textile products is higher than other products due to precautions taken for Covid.

Gulia said the garment and apparel market faced a setback during the second wave of pandemic due to fear of unknown and lockdowns.

Corrections on cards?

Marwaha said ICRA expects cotton yarn realisations to correct further from current levels as supply normalises and amid pressures from the downstream players. But they are expected to remain high and average higher than last year, with increased concerns on use of a major Chinese cotton variety for export purposes.

“This should keep demand for Indian cotton as well as cotton yarn healthy, keeping an upward bias in cotton yarn prices as well,” she said.

Export prospects for Indian cotton yarn remain healthy, she said, adding that Indian cotton and yarn remain competitive in the international market. “This factor is likely to support export demand for the Indian cotton yarn in the international markets,” the ICRA official said.

SVP’s Gulia said the worst time for the manufacturing industry, particularly textile, is over. “The industry is well prepared for any eventuality (including a third Covid wage). The worker force has been vaccinated, Covid protocols are followed and medical preparations are almost complete. All these factors assure that there will be minimum effect in the short-term,” he said.

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Marwaha said with corrections in global and domestic stocks (domestic cotton acreage likely to be affected because of erratic rainfalls) and increase in MSP, cotton prices are expected to stay firm and average higher than last year.

She said cotton planting has been affected and the area could be six per cent lower than the pre-Covid levels. This could keep cotton prices firm in the new season too, Marwaha said.

However, Selvaraju said cotton prices could ease during the peak arrival season and even drop below the new minimum support price of ₹5,726 a quintal.

Published on August 13, 2021

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