COTTON NEWSLETTER 0.1
The cotton market has been range bound for the last few weeks. Prices had hit a high of Rs.
12000 per mound (Hanumangarh) on 17th May and after correcting around 10% from the
top, they have been consolidating in the range of Rs.10500-11000 per mound for the last 20
days. Shankar 6 prices are trading in the range of Rs. 102000-105000 per candy after making
a high of Rs. 115000 per candy.
Yarn demand has been pretty weak in the last month. Small and medium size spinners have
cut their operations significantly and are running at around 60% capacity. It is not
economically feasible for spinning mills to manufacture yarn at current prices of cotton.
Recently, Vardhman Textile Mills MD highlighted on their quarterly conference call that they
are currently operating at a negative EBITDA.
Recently, there were news doing the rounds that Indian weavers have placed large orders
for yarn from Taiwan as they are getting it at a cheaper rate than Indian Yarn. India is one of
the largest exporters of Cotton Yarn in the world. It has happened for the first time in the
history that cotton yarn is being imported in huge quantities by the weavers. This has
further exacerbated the problem.
Most of the spinning mills have either cut down their production or switched to alternative
fibres like polyster. Orders placed for cotton from US and Australia are taking more than 2
months to get delivered because of the supply chain issues. Even though there is paucity of
cotton in the market, weakening of demand at higher prices has caused a correction of
around 10% from the top. The next 3 months will be very challenging for the spinning mills.
Supernormal profits made by them in 2021 gives them some cushion to bear the losses.
The latest sowing data published by the Indian government has not been impressive so far.
Lack of irrigation facilities and power cuts has restricted the sowing to only 105% of last
year. At current prices of cotton, sowing should have increased by atleast 20% on a year on
year basis. We will get the complete sowing picture by the end of this month.
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.
Moreover, the Texas region in US (main cotton growing region in US) has been facing
drought and this would mean that the US production not be significant unless they witness
a good rainfall. Prices of crops like soyabean and corn (which are grown in the same season
as cotton) have also increased substantially, especially after the Russia Ukraine war. Hence,
cotton is not the obvious choice for the farmer to grow.
Where to from here?
We believe that weakening of demand by the spinning mills and central banks efforts to
curb inflation will put a cap on the cotton prices and it will be difficult for the prices to move
upwards.
However, lack of abundant supply will support the prices from falling meaningfully. Even in
the new cotton season, considering the sowing data and negligible opening stocks, we
believe that the odds of prices falling more than 15% from here are very low. Both weak
demand and supply should keep the market rangebound.
