Indian cotton production is expected to rise 13.6 per cent. Cotton prices are down eight per cent since September and 16 per cent lower from the high touched in April. The new cotton season from October 2019 to September 2020 ushers in a hope of lower raw material costs for yarn mills. This could give a leg-up to profitability in the coming quarters amid weak exports.
Mills can benefit from a drop in prices. Most of them are saddled with high-price cotton inventory, which eroded profitability in the last two or three quarters. The spinning industry saw disruptions in production in the second quarter of the fiscal owing to reduced demand and volatility in cotton prices. Larger mills such as Ambika Cotton, KPR and Vardhman maintained operating margins at about 16 per cent to 18 per cent but many small units faced high cotton prices. Shares of Vardhman and Ambika Cotton have fallen 17 per cent and 28 per cent in a year, while KPR Mill’s share price was buoyed by a recent buyback offer.
The US-China trade war halved yarn exports to China due to weak demand. This was further aggravated by duty-free access allowed to Pakistan and Bangladesh by China.