COTTON NEWSLETTER 0.5
Last one month has been extremely volatile for the cotton market. New York futures rebounded to 88
cents after having touched 52 week low at 81.5 cents/pound. Dollar Index is trading at 113.4, close to its
2 decade high of 114.75. Indian cotton prices are trading at Rs. 72000 per candy (Shankar 6 – Gujarat)
and Rs.7350 per mound (J34- Hanumangarh). Even at these levels, mills are not aggressively buying
because of lack of demand in the downstream channel and expectation of further correction.
The Federal Reserve hiked rates by 75 bps in its September meeting and the strong unemployment
number has strengthened its case for more hawkish interest rates. This can keep commodity prices
under pressure. Even after these hikes, if the inflation rate doesn’t fall materially, then we may see
markets becoming a bit jittery.
Cotton arrivals have been slower than expected. It is estimated that Pan India daily arrivals are not more
than 40000 bales. After having seen prices of Rs. 12000 per quintal, farmers are reluctant to sell at a
much lower price. Farmers are only bringing that much crop in the market which is sufficient to fund
their expenses. This along with the rainfalls in many areas has led to slower arrivals in the market.
Some regions in Upper Rajasthan (Alwar, Khairtal) & Haryana have been damaged badly. These areas are
facing continuous rainfall for the last 4 days. North India crop estimates maybe revised downwards to
around 50 lakhs bales (+/- 4%). Punjab and Haryana are receiving subpar quality (poor fibre length). So
far, lower Rajasthan is getting very fine quality cotton this season which has not been experienced in the
last many years. Slow arrivals, rainfalls in various stations and huge short covering (in the physical
market) led to some firmness in price in last one week.
After a great 2021, its been a pretty harsh year for the spinning mills. Even after a 30% fall in the cotton
prices, spinning mills are running at only 45-55% capacity. The yarn market has been struggling with
weak demand for the last 8 months. We are seeing some signs of demand reviving in the yarn market
but its still early days. Yarn prices have seen some uptick (by Rs.10-15) in the last few days after
correcting sharply. Before the start of the season, we had expected that considering the negligible
opening stocks, mills would rush to buy cotton as the season begins but lack of demand in the yarn
market forced them to stay on the sidelines. However, we believe that demand should slowly start
returning in the market as the pipeline remains empty. Mills should see a positive margin on yarn
conversion once cotton prices trade around Rs. 65000 per candy.
Where to from now?
With Indian cotton still trading at a significant premium to international cotton prices, we expect the
market to correct further, albeit at a lower pace and stabilize around 65000 Rs. per candy as and when
pace of arrivals increase in the market (post Diwali). Indian textile industry will continue to remain
uncompetitive in the global markets unless this premium falls.
