"The cotton supply situation is expected to improve in the next one year, supported by favourable weather conditions and prevailing remunerative cotton prices, which are expected to trigger an increase in cotton sowing for CY2018, highlights recent report on the Indian Spinning Sector by ICRA Ratings. A few initial weeks of the cotton sowing season have already witnessed increased acreage vis-a-vis last year and the trend is expected to sustain."
The cotton supply situation is expected to improve in the next one year, supported by favourable weather conditions and prevailing remunerative cotton prices, which are expected to trigger an increase in cotton sowing for CY2018, highlights recent report on the Indian Spinning Sector by ICRA Ratings. A few initial weeks of the cotton sowing season have already witnessed increased acreage vis-a-vis last year and the trend is expected to sustain. This is likely to be complemented by the forecast for normal monsoons, with the possibility of El Nino formation gradually waning.
As per ICRA estimates, domestic cotton output is expected to increase by 6 per cent to 36 million bales in CY2018. Says Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, “The expectations of higher output in the upcoming cotton season supported by increased sowing and a favourable monsoon forecast is likely to create a downward bias in cotton prices from Q2 FY18 onwards, vis-a-vis the peak levels witnessed during the past one year. This augurs well for the domestic cotton spinning industry.”
Withstanding challenges
The Indian cotton spinning industry has been facing twin challenges of subdued demand and high cotton fibre prices as a result of tight cotton availability since Q2 FY17. Amid a decline in exports to China and subdued domestic demand following the demonetisation drive, the growth in total spun yarn production declined to a five-year low in FY17. On demand side, the weak trend in production during FY17 was primarily due to a steep decline in cotton-yarn exports, which typically account for roughly one-third of India’s total cotton yarn output. The cotton yarn export quantity was lower by 12 per cent on a y-o-y basis, primarily driven by a steep decline in overall yarn imports by China.
“As the previous round of reserve cotton auctions in China ended, India’s cotton yarn exports recovered temporarily in Q3 FY17. The trend, however, was not sustainable as the commencement of fresh reserve cotton auctions in China from March 6, 2017 again resulted in a steep decline in yarn exports from India in the months of March and April 2017,” Roy added.
Despite the weakness in production and sales volumes, domestic cotton yarn prices continue to be firm following the high cotton prices. However, the possibility of a further increase in cotton yarn prices is low due to weak export prospects. Further, the likely downward bias in cotton prices from Q2 FY18 onwards may soften the domestic cotton yarn prices on a y-o-y basis. Given the weak prospects for exports, yarn demand is expected to remain subdued. Accordingly, capacity utilisation and hence, profitability of spinners is likely to remain range-bound at a modest level sustained during the past three years.
