COTTON NEWSLETTER 0.2
Last 2 weeks have been full of turmoil in the global cotton markets. ICE Cotton crashed by
more than 35%. Globally, all major commodities have seen a rapid decline last week with
cotton being punished the most.
All time high on call sale fixations were supporting the US Cotton futures market until mid
June. However, unwinding of the spec positions at the close of expiry led to a significant fall
in the US markets.
Monetary tightening by central banks and a rising dollar has created pressure on commodity
prices. We have seen correction in metals and now agri commodities prices have also
started to cool off. Clothing being a discretionary product is bound to be impacted in a
global slowdown. Hence, the cotton market is more vulnerable than other agri
commodities.
Indian Cotton markets too witnessed some panic last week. J-34 Quality cotton
(Hanumangarh Station) which was quoting at Rs. 10500 per mound on 18th June crashed to
8500 Rs. in one week. However, lack of supply in the physical markets has eventually caused
prices to recover to levels of Rs.9500 per mound. Shankar – 6 (Gujarat) quality cotton is
trading at around Rs. 93000-97000 per candy. It has been the most volatile week since
March 2020.
Yarn prices have also corrected by more than 15%. Yarn market has been witnessing weak
demand because of high prices and slowdown in global consumption. Most of the textile
mills in India have cut down their production and are running much below their peak
capacity. Also, Indian yarn is no longer competitive in the International market because
Indian cotton has been trading at a very high premium compared to other markets.
Remember, that mills will not have any opening stock at the start of the new season, so they
will have to buy atleast 15% more cotton in the next season (assuming an average inventory
of 2 months). Therefore, a 10-15% increase in production will not put a significant pressure
on prices.
Forward contracts in the cotton market for the months of November and December have
been happening in the range of Rs.75000-80000 per candy. This has further exacerbated the
situation for spinning mills as yarn buyers are now asking for discounts and are deferring
their purchases as they expect further fall in yarn prices.
Moreover, Indian spinning mills had imported more than 15 lakh bales in the month of May
after the government had scrapped the import duty. The imported cotton shipments which
are expected to arrive in the month of July and August were purchased at an average price
of around Rs.100000 per candy. Mills will be suffering heavy losses on these purchases as
yarn prices have corrected in the last 2 months.
Even after a bumper increase in cotton prices over last one year, Indian cotton sowing data
hasn’t been very encouraging. There hasn’t been more than 10% increase in the overall
sowing for the new crop. Lack of irrigation facilities and power cuts are some of the reasons.
It will be interesting to see how the monsoon behaves.
Where to from here?
We believe that lack of supply in the physical market will continue to provide support to the
Indian cotton prices and it is unlikely to fall materially till the new crop comes in by mid
September.
