World cotton trade may suffer from Indian export ban
The International Cotton Association (ICA) has expressed dismay at the Indian Government's decision to put in place another unilateral cotton export ban. As the second largest producer and consumer of cotton in the world, with a world market share of approximately 20 per cent and one of the largest exporters of global cotton, the ICA believes that the actions taken by India will have serious consequences and a major, detrimental impact on world cotton trade.
The ICA is the world's largest and most recognised arbitral body. The core principle of the ICA is to promote a safe trading environment so that contract sanctity may be preserved; essential to having a sound and sustainable cotton trade. The ICA's Bylaws & Rules are used by the vast majority of cotton firms trading Indian cotton.
The 2010 announcement by the Ministry of Textiles to suspend the registration of export contracts led to numerous arbitrations at the ICA, as many firms, including a large number of Indian firms, were unable to perform their contracts.
The ramifications of the 2010 ban led to a huge disruption of trade, with many firms having to pay out large sums of money as a consequence of arbitration awards against them.
Those that did not pay found themselves on the ICA and CICCA (Committee for International Cooperation between Cotton Associations) default lists, resulting in damaged reputation and the collapse of business relationships and trading opportunities. The ban was also a key element in the extraordinary rise in world cotton prices reaching unprecedented historical heights.
The ICA believes that the current ban will produce the same results and, once again, undermine India as a reliable trading partner. Already the current ban has sparked a limit-up move in New York Futures cotton prices. Although it is too soon to know the ultimate movement of prices, from experience, we know that the volatility of prices results in business disruption, contract disputes, arbitration processes and defaults.
During the 2010 ban, the ICA wrote to the Indian Textile Commissioner expressing its view that Indian policy regarding cotton imports and exports should be communicated well in advance. In addition, at the meeting of the International Cotton Advisory Committee in Buenos Aires last September, at which there was an official Indian delegation, the ICA made a statement encouraging governments to promote sound trading conditions with transparent and predictable trade policies, with sufficient clarity and anticipation so as not to disrupt trade.
What is particularly perplexing to the ICA is that this current decision to ban cotton has come about without any prior intimation or communication. The ICA is also concerned that the impact of this ban may be more severe, as it includes 'registered contracts' i.e. ones that have been accepted by the respective Indian government entity.
The ban also extends to includecontracts with open Letters of Credit or Prepayments plus cotton in the process of being shipped to port and being stuffed in containers and loaded onto vessels. Customers in many importing countries who are counting on this cotton to run their spinning mills will suffer irreparable loss and damages.
In a letter to the Indian Minister of Commerce & Industry the ICA urges India to rapidly reconsider its policy and revoke the ban with immediate effect to enable international contracts to be executed without further defaults and reputational damage. The Association has also requested urgent talks with the Minister to discuss the issues in greater depth and to try and find solutions to preserve contract sanctity and create a safer trading environment.
The International Cotton Association (ICA)