Falling Prices Could Provide Relief for Indian Mills
December 21, 2011 Few things are as reliable and consistent as the law of supply and demand – as the global cotton and textile industries are discovering, for better or worse. The effects are especially clear right now in India, where production forecasts have been trending upward at a time when worldwide demand for yarn is lukewarm, at best.
However, domestic yarn demand is picking up and cotton prices are coming down, already reaching August 2009 levels. Combined with the fact that stocks – after remaining swollen since the cotton price bottomed out earlier this year took the yarn price down with it, leaving mills with very high-priced inventories of raw materials – are finally being cleared out, the numbers paint an optimistic picture for Indian spinners.
As the industry has learned over the years, however, all members of the supply chain are inextricably linked to the other members, meaning the good times and bad are usually shared by everyone. The fundamental issue now is how to make the entire value chain healthy so that the consumption of cotton increases, from the ginning industry to the apparel industry.
“Lower prices of cotton mean lower costs being passed through the entire value chain, which is what the industry needs now for the revival of cotton,” Amit Agarwal, executive director of Amit Cottons, told Cotton International. “I have been talking to some of the local spinning mills who have now exhausted the stocks they carried forward from last year. Until this quarter, mills have been very conservative about buying cotton in the current season. They’re just buying hand-to-mouth requirements.”
At current prices, mills are in a much better shape to turn a profit in the coming quarter. To date, however, only about 20% of the current crop has been brought in the market by the farmers, who might be holding back their fiber in the hopes they can get the same prices as last year.
“Now here is the irony,” Agarwal continued. “Sooner or later, farmers will realize that last year was a ‘one off’ year for them, as well as for those who saw the huge spike in cotton prices. I expect the cotton arrivals to increase at a much faster pace because ultimately, the farmers will run out of patience and need money. This means that although the farmers have to be satisfied with the current prices of cotton, the spinning mills would not mind a delay at all, as they have waited all through the current cotton season to stock up for the rest of the year. This might just be a blessing in disguise for building up inventory to last for the rest of the cotton season.”
Indian exports are another peculiar situation. To date, the only major buyer from India has been China, whose intentions for the new year remain unknown.
“If they come out with an unexpected tariff structure or reduce the quota, the outlook for Indian ginners and farmers goes down the drain because there will be an excess supply of cotton,” Agarwal says. “Today, the cheapest cotton China can import is Indian cotton, so and I expect that they will keep filling their reserves until they reach a satisfactory number.
“For India, the only way out right now is for mills to increase their consumption, because at the current levels, their yarn will fetch them profits. However, after the beating they took last year, most of the mills are short of funds and the world’s macro economy in general — and India’s economy in specific — has pushed up the borrowing cost of money.
“So we just have to wait and watch who blinks first when we enter the new year: Indian spinners or Chinese buyers. Until then, the farmer will just have to hope that gets the right price for his produce and doesn’t dither on shifting his crop to the next season,” he concludes.
GET THE NEWSLETTER TODAY!
