Softening cotton prices revive sentiment of mills in H2FY20

Consumption seen rising 5% to 28.8 mn bales this year, compared to 27.4 mn bales last year

Spinning mills in the country are on the cusp of a revival in the second half of the current financial year due to a sharp decline in raw material cotton prices as well as stable realisations from yarns.

Cotton prices have declined by more than 8 per cent since April with the benchmark MCX variety ginned cotton trading at ~18,650 a bale (170 kg) on Saturday against ~22,600 a bale in the first week of April. By contrast, however, cotton yarn prices remained stable at ~250 a kg of fair trade combed of 42 count variety.

“Cotton prices are currently subdued. But steady improvement in cotton yarn demand works out better for spinning mills,” said Atul Ganatra, president, Cotton Association of India (CAI).

R K Dalmia, senior president, Century Textiles and Industries, believes that cotton price decline may not necessarily prompt fabric manufacturers to cut their product prices. However, it would certainly help improve profitability in the quarters to come.

Meanwhile, the Indian cotton scenario was adverse for spinners in H1FY20 as prices fell significantly globally to around 50- 60 cents/lb (pound) whereas domestic cotton prices were stable in the range of 80 cents/lb (owing to shortage of the cotton crop).

On the other hand, international yarn rates corrected with a steep decline in cotton prices.

“Despite more than 8 per cent correction in domestic cotton prices since April, which narrowed the premium over international cotton, domestic cotton continued to be expensive till October (around 2 per cent premium in October against 7 per cent premium in the quarter ended September). This affected the competitiveness of domestic spinners,” said Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA.

In a further support to the cotton price decline, the Cotton Advisory

Board, under the Union ministry of commerce, has forecast India’s cotton output to rise by 9 per cent to 36 million bales this year compared to 33 million bales last year.

Since the board has estimated cotton consumption to rise by 6 per cent (3 per cent less than the growth in production), the fibre’s prices are expected to remain subdued this year. The board forecasts that consumption of cotton by mills will rise by 5 per cent to 28.8 million bales this year compared to 27.4 million bales last year.

Therefore, in the first six months between April and September, the country’s average monthly exports (yarn) fell by 28 per cent to 74 million kg against the average of 102 million kg in the previous year. Cotton yarn exports to China for the first six months dropped to 20 million kg against 40 million kg in the corresponding period last year.

“Recently, Indian cotton prices fell, with the new cotton trickling in, in tandem with international prices. Also, yarn prices have remained stable, thereby improving the profitability scenario for Indian spinning companies like Vardhman Textiles (VTL). Hence, we believe H2 should be better than H1 in terms of spread for VTL that continues to operate at full yarn capacity,” said Bharat Chhoda, an analyst at ICICI Securities.