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Cotton prices are to remain firm through 2010-11
Dec '10
Fitch Ratings has commented that the continued sharp rise in cotton prices globally is likely to hurt operating margins of Indian textile manufacturers, as prices percolate down the value chain, and are ultimately reflected in high prices of textile and clothing products.

Fitch believes that cotton prices are expected to remain firm in the current cotton season of October 2010 to September 2011, well above the previous season, due to the huge international demand-supply gap, and untimely rains in major cotton producing states in India. The picture should be clearer after anticipated arrivals into the domestic market over December 2010-January 2011, the peak period for such arrivals.

The global demand-supply imbalance is driven mainly by China's increasing domestic cotton consumption, flood-led weak harvests in China and Pakistan, and with India capping its cotton exports to a maximum 5.5m bales to be shipped by mid-December 2010 in order to make cotton available domestically. However, the capping has not helped the domestic textile sector much in the backdrop of soaring international cotton prices, which has encouraged speculation by traders and creation of artificial scarcity in the domestic market. The Indian government is expected to take a call shortly on allowing further exports of cotton.

Cotton prices have risen unusually since August 2010, and as at end-November 2010, prices were hovering at INR108-INR118 per kg (up 60%-70% yoy) across common varieties of cotton. To soften cotton and cotton yarn prices, and ensure adequate availability of yarn in the domestic market, the Union Government has capped cotton yarn exports for the current cotton year to a maximum of 720 million kilogram (kg) to be shipped by mid-January 2011. This initiative is intended to aid the garment industry by reducing input prices. However, yarn spinners will suffer as their selling prices are likely to fall. Yarn exporters also fear losing export customers to their global counterparts.

While cotton prices have increased 30%-35% across common varieties over August 2010-October 2010, yarn prices have increased in the same period by only 15%-20%; this indicates a partial pass-on of price hikes, although the input price hikes may be passed on fully with some time lag. Fabric prices have also gone up, although end-product prices have not increased in tandem. Should cotton prices continue to remain firm, garmenters are likely to also hike end-product prices. However, in the already committed fixed-price contracts, garment exporters might have to suffer on account of rising input prices as well as the appreciating Rupee.

In light of the sharp rise of cotton prices, smaller cotton spinning mills face the threat of shutting-down if they are unable to buy and stock cotton in the ongoing cotton-buying period of October 2010-February 2011). Also, Fitch expects profitability pressure across the value chain given the trickle-down effect of mounting input prices. However this could be mitigated by a diversification into synthetic and other natural fibres.

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