Spinning mills in TN may refuse to sign cotton import deals with ICA members 

Subramani M R _300226 | | Updated on: Aug 01, 2022

The exemption of customs duty on raw cotton imports has been extended till October 31

TASMA asks units to avoid ‘unbalanced’ deals, defers blacklisting defaulting sellers by a week  

Spinning mills in Tamil Nadu are unlikely to sign any new contract for importing  cotton from sellers who are members of the International Cotton Association (ICA) as the terms and conditions are “one-sided”, loaded against the buyers. 

The development comes on the heels of TASMA taking up with ICA the issue of some of its member-mills, which had entered into contracts to import cotton, not receiving shipments even for deals that expired in March and April. 

‘Breach of contract’

The ICA has termed any delay in the arrival of cotton imports outside the contracted period as “a breach of contract” and said buyers could reverse the deal. 

The Tamilnadu Spinning Mills Association (TASMA), in a communication to its members today (August 1), said mills should not sign the current text of contract that has been found to be “completely one-sided and not anyway balancing” the interest of buyers and sellers in a fair manner. 

TASMA Chief Advisor K Venkatachalam said unless and until ICA comes forward to change its model draft by providing suitable provisions balancing the interest of sellers and buyers in case of default, mills were “advised” not to make any further orders with ICA members for cotton supply.

Move to blacklist 

In a related development, the association — at a meeting of its members held on July 30 — decided to put off by a week a move to blacklist sellers who had defaulted in cotton delivery. This was done to get a better feedback from its members, TASMA said in its communication. 

The issue of default by the sellers, particularly ICA members, was discussed in detail TASMA member-mills again expressed the difficulties experienced by them to get the cotton on time despite their efforts. 

The ICA, in a letter to TASMA, had said the buyers had the option of “invoice back” or reversing the deal. Buyers were now insisting on cancelling the contract and seeking refund of the advance they had paid for the deal. 

“...the suppliers/shippers are not accepting to cancel the contracts, as the model text of contract, as provided by the ICA, as per their by-laws never go with the matter of cancellation of contracts on such defaults,” TASMA told its members. However, since the members of TASMA are no way connected with the bylaws of the ICA, it would be a question of law if the rules were binding on the mills that are not ICA members. 

‘Not suitable remedy’

The one week time was sought to try and reach an amicable settlement with the suppliers or shippers. Many members favoured blacklisting of defaulting  suppliers and shippers from dealing with their mills.  

Responding to TASMA letter on non-delivery of contracted cotton, ICA Managing Director Bill Kingdon, acknowledged seeking a reversal of the deal may not often provide a suitable remedy. He expressed surprise over allegations by TASMA that there was no protection in the trading rules for quality-related complaints, including weight differences. 

Kingdon said quality related issues can be settled as per ICA bylaws and rules.  

“If buyers cannot reach an agreement with the seller, they can apply for arbitration. We believe that there is good protection for cotton buyers and sellers alike on all quality matters,” he said.

Lack of communication

Venkatachalam in his initial letter told the ICA: “Some of our members had signed contracts with suppliers and shippers for delivery of cotton in March and April this year and they have reported that the deals have not been honoured. Though four months have lapsed in some cases, suppliers and shippers are not providing any satisfactory reply.”   

Kingdon blamed global logistics companies for the poor performance behind the delay and default of cotton shipments to spinning mills in South India. The logistics firms were showing “no immediate sign of improving”. 

Sharing TASMA’s concerns over delays and uncertainty in getting the consignments, the ICA official said changes to consignments and shipping dates were hampering all as “we try to track cotton and communicate updates”.  Though ICA had communicated to its members about shipping delays, the sellers, who are members of ICA, failed to apprise the buyers of the situation, leading to the current standoff. 

The problem for the buyers is that ICA says carrying charges and delayed shipment were not part of the ICA bylaws and rules, though it “consistently encourages” its members to make provisions for these within their contracts.  The ICA has asked its members to communicate “openly and effectively throughout the contract execution period”. 

Referring to allegations of buyers being forced to sign “one-sided contracts”, Kingdon said he encouraged TASMA and its members to join ICA and it would “help by shaping and improving the ICA’s international cotton trading rules”. 

Spinning mills in Tamil Nadu have entered into deals worth ₹400 crore and TASMA members have paid ₹60 crore as a 15 per cent advance out of the contracted cost, Venkatachalam told BusinessLine last month.

Panic purchases

Trade sources say some mills had rushed to sign import deals in panic as cotton prices headed towards  ₹1,00,000 a candy (356 kg). Prices have dropped since June on fears over economic slowdown and recession. Currently, the rates have dropped to ₹91,500-92,000. 

In agricultural terminal markets across the country, the net weighted average modal price of raw cotton (kapas) has dropped to ₹10,460 a quintal from over ₹12,000 in May. 

In the global market, the benchmark Cotlook A index is currently at 126.55, but Cotlook A forward index is 105.50. On the Inter Continental Exchange, New York, benchmark cotton futures are currently ruling at 100.30 US cents a pound (₹62,750 a candy).

Published on August 01, 2022
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