Rise in cotton prices to squeeze profitability of ginners and spinners: Ind-Ra.

PUNE: The sharp rise of over 35 per cent in domestic cotton prices since May 2016 will squeeze ginners and spinners profitability by over 15 per cent, says India Ratings and Research (Ind-Ra). Ind-Ra expects prices to remain elevated around the current levels of Rs 120/kg - Rs 127/kg till the end of the cotton crop year of September 2016.

The spike in cotton prices has been due to the 7.4 per cent yoy fall in its production domestically at 35.2 million bales in crop year October 2015 to September 2016 (CY16), as per the Cotton Advisory Board estimates and globally by 18 per cent yoy to 98.1 million bales in CY16, as per the United States Department of Agriculture.

Ind-Ra expects profitability of pure cotton ginners and spinners will be lower by at least 15 per cent, on account of their inability to pass on this steep increase in cotton prices to their customers, due to decreasing cotton demand and increased competitiveness of manmade fibre.

"Demand for manmade or blended fibres has been rising due to the fall in crude prices and lower exports of raw cotton in 2016. In fact, in spite of lower production in CY16 as compared to CY13, the prices have consistently remained lower than the peak of CY13, on account of decreasing demand for cotton," stated an Ind-Ra release.

The increase in prices will impact small textile players the most, since cotton is the key raw material and it will also lower their inventory holding capacity. Ginners and spinners are most likely to be affected, however, some organised spinning units with interchangeability from cotton to blended or manmade yarn, will be able to adapt. Also players which stocked up cotton at lower prices in March-April 2016 are better placed. Further, fabric manufacturers are likely to be affected the least, on account of their better interchangeable use of looms.

According to Ind-Ra, cotton traders are likely to perform substantially better in CY17, on account of inventory gains from existing stock at lower prices of below Rs 34,000 per candy (one candy is 356 kg) in March (last month of the cotton production season) and having sold at higher realisations of above Rs 36,000 per candy post May, up to Rs 42,000 per candy in June.

The lower production of cotton in India is mainly due to two consecutive bad monsoons and damaged cotton crop, caused by the pink bollworm pest in central and southern belt in India and due to whitefly pest attacks in northern India. Ind-Ra expects the acreage under cotton cultivation to fall in CY17 from 119 lakh hectares in CY16 (provisional as per Cotton Advisory Board), despite higher realisations. Fear of losses from pest attacks and due to the lack of alternatives to biotech cotton hybrids, acreage is likely to decline. This may push up cotton prices further, however increasing demand for manmade fibre, will contain the price rise.

The recent government directive to Cotton Corporation of India to sell its entire cotton stock acquired through the minimum support price scheme to micro, small, medium scale spinning units will help contain the price rise of cotton. "However, cotton prices will not see any steep decrease, till the arrival of the next cotton crop, since the prices already factor in the release of stock from inventory," the release stated.

Source : economictimes.indiatimes.com