India is one of the world's leading producers and exporters of cotton yarn. The country's cotton yarn industry is characterised by a wide variety of production counts across different locations. However, cotton yarn prices are influenced by several underlying factors.

Recent developments and their impact

Recently, the turmoil in Bangladesh, along with potential shifts in orders and the type of cotton yarn being produced by companies, has created a significant impact on the market. The ongoing protests in Bangladesh and the emergence of geopolitical issues globally have increased pressure on the textile industries in Asia. Furthermore, declining demand and the possibility of recessions in key countries are adding additional strain on suppliers.

Factors influencing cotton yarn prices

Cotton yarn prices are affected by various factors, including the production capacity of companies, government policies, and exchange rates. These elements collectively influence the cost and availability of cotton yarn in the market. The table below provides a summary of the key factors that can affect cotton yarn prices in India.

Table 1: Drivers of cotton yarn demand in India

Cotton yarn prices for 30/1 cotton yarn

The cotton yarn prices in south India have remained higher due to increased demand and a shift in production towards higher-count yarns. Many mills in south India have shifted their focus to producing 80 count cotton yarn, reducing the production of lower-count yarns such as the 30/1 variety. This shift has led to a decrease in the supply of 30/1 cotton yarn in the market, thereby driving up prices in the southern region. In contrast, prices in north India have remained relatively stable, with no significant daily changes.

Figure 1: Cotton yarn prices in north and south India (in ₹/kg)

Source: TexPro

*These prices are quoted by major Indian mills and do not necessarily reflect actual trade prices.

This difference in cotton yarn prices reflects the varying sentiments and outlooks of the spinning industries in the respective regions. In northern India, market actions tend to respond more directly to changes in cotton prices. Conversely, the southern region, with its significant concentration of apparel production zones, experiences higher demand for cotton yarn, influencing price trends differently.

The recent spike in cotton prices, driven by reduced production and lower arrivals due to unfavourable weather conditions and uncertain rainfall, has affected the availability of cotton in the market. These factors have contributed to the price dynamics in both regions: prices in north India have remained relatively stagnant, while prices in the south have shown volatility. This volatility is further influenced by factors such as cotton availability, stockpiling practices, and external conditions, including the ongoing crisis in Bangladesh, which has disrupted the textile industry.

Price forecasting

Cotton yarn prices are exhibiting fluctuating trends. Based on current observations, there could be a slight uptick in prices on a monthly basis.

Figure 2: Price forecast for 30/1 cotton yarn (in ₹/kg)

Source: TexPro

Price fluctuations in cotton yarn often reflect the balance between supply and demand. Typically, high demand coupled with limited supply pushes prices upward, while an ample supply and lower demand drive prices down. In FY23, India experienced a surge in yarn production, indicating that yarn prices could decrease soon. ICRA has forecast further increases in cotton yarn production for the coming financial year, reinforcing expectations of falling prices. However, rising production alone may not be sufficient to curb price increases, as higher import duties on cotton could still exert upward pressure on prices.

Raw cotton is a significant cost driver, comprising approximately 60 per cent of the total cotton yarn production cost. This makes the cotton yarn spread—the difference between raw cotton and yarn prices—a critical factor for profitability. In FY23, this spread was around ₹100 per kg, which had a substantial impact on the profitability of yarn suppliers. Lower spreads observed in FY24 suggest a further squeeze on profit margins. In addition to raw cotton, other production costs such as labour, energy, and raw material prices play significant roles. Energy costs, which account for about 15 per cent of total costs, vary significantly across states due to differing tariffs, prompting calls for a unified national power rate. Additional factors, such as machinery, labour costs, and compliance with sustainability standards, also contribute to upward pressure on cotton yarn prices.

Broader economic conditions, including inflation, currency exchange rates, and monetary policies, significantly influence production costs and pricing strategies. One key economic factor is the minimum support price (MSP) for cotton, which was recently raised by 7 per cent to ₹7,121 per quintal. This increase is expected to be a major determinant of yarn prices going forward. Geopolitical uncertainties, particularly in Asia, further complicate pricing dynamics, with policies like China Plus One and ongoing turmoil in Bangladesh affecting market demand. Trade policies, such as proposed import tariffs on man-made yarns and existing taxes on cotton yarn imports, add another layer of complexity to pricing. Meanwhile, technological advancements offer potential cost-saving benefits but can also temporarily elevate prices due to high initial investments.

Despite an increase in spinning capacity in India over the years, which suggests a stable supply of cotton yarn, the main supply of cotton continues to impact cotton yarn prices. India has the second-largest spinning capacity in the world, right after China. However, due to the recent cotton shortage leading to higher cotton prices, the cost of cotton yarn in the country may remain elevated in the near term. As a result, firms may need to operate with narrower margins.

Road ahead

The price of cotton yarn is highly sensitive to stability across all the factors that influence it. From institutional decisions, such as the minimum support price (MSP) for cotton, to the profitability and production choices of firms, prices are also impacted by the prevailing conditions in key market countries like Bangladesh. These factors, along with various other associated elements, indirectly influence the pricing of cotton yarn.

While it is challenging to isolate all the factors affecting cotton yarn prices, certain elements are expected to play a predominant role. Demand from the downstream sector, the situation in Bangladesh, and the supply of cotton are likely to be key determinants in shaping the future prices of cotton yarn.

Fibre2Fashion News Desk (KL)