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Rising exports may infuse life into cotton sector

"Quality will be the most important factor apart from the rupee’s value for India’s exports as other countries like Australia, Uzbekistan and Turkey will also be selling to Vietnam, Pakistan and Bangladesh. Though Bangladesh, Pakistan and Vietnam have replaced China as India’s main cotton export destinations, volumes are picking up at a slow pace and are unlikely to match Chinese demand."

 

07TH COTTON

Demand for Indian cotton is likely to increase between four and five per cent in 2015-16 and around five-six per cent in 2016-17, as exports recover slowly. As exports to Vietnam, Pakistan and Bangladesh are expected to be higher than a year ago, the cotton sector is likely to revive moderately in the 2016-17 season (August-July). According to the cotton sector outlook released by India Ratings and Research (Ind-Ra), Vietnam is likely to increase its spindles capacity by 30 per cent in FY16-17.

Quality, the deciding factor for business

cotton harvest

In this scenario, domestic production in Pakistan and Bangladesh will not be able to keep pace with the increasing demand for apparels in these two countries, providing opportunities to Indian exporters, the research agency said in the report. Quality will be the most important factor apart from the rupee’s value for India’s exports as other countries like Australia, Uzbekistan and Turkey will also be selling to Vietnam, Pakistan and Bangladesh. Though Bangladesh, Pakistan and Vietnam have replaced China as India’s main cotton export destinations, volumes are picking up at a slow pace and are unlikely to match Chinese demand. China was buying about 46 per cent of India’s total cotton exports until it changed its policy after 2013-14.

According to Ind-Ra, prices are likely to remain at the current level, between Rs 33,000 and Rs 36,000 per candy, with China reducing imports significantly and moderate demand from the Indian spinning industry. One candy is 3.56 quintal of lint cotton. It is the unit for sale of cotton in most Indian states. The continuation of direct subsidy-based policy by China and an unlikely jump in the domestic demand will keep Indian cotton prices under pressure, according to the report.

Operating margins will stay between one per cent and two per cent for ginners and traders, but the profit after tax margins may improve as the companies reduce stocks and focus on receivables management. International cotton prices, however, will remain sensitive to the release of cotton by China from its official reserves.

Managing the shortfalls amid increasing demand

Beijing has been able to limit imports to mostly meet shortfalls in production in relation to consumption, after the change in China’s cotton policy to support farmers by making cotton available to mills at market rates. Imports are likely to be even lower next year because China will consume the cotton it had stocked in the previous years.

India’s cotton acreage will reduce to 12 million hectare next year from 12.9 million hectare this year due to farmers shifting to other crops such as guar, soya bean, groundnut and pulses. These competing crops are currently giving better remuneration than cotton.

Demand for Indian cotton is likely to increase between four and five per cent in 2015-16 (August-July) and around five-six per cent in 2016-17, as exports recover slowly. Cotton yarn, exports are under severe pressure on account of China’s policy that has shored up local demand of cotton and made India’s cotton yarn export uncompetitive. But the Indian industry will provide some support driven by the enhanced domestic consumption of fabrics, apparels, and home textiles in view of lowering interest rates, rising discretionary income, favourable demographics and moderating inflation.

The report said, a mismatch between spinning and fabric sectors – yarn manufacturing expanded rapidly in the past few years, while fabric manufacturing base remained stagnant – has created a glut in the domestic market, making Indian players vulnerable to export demand.

The Ind-Ra report explained that stock levels with the public sector Cotton Corporation of India have estimated to increase to 8.6 million bales on March 31, 2015 from 0.4 million bales as on March 31, 2014. However, since then stocks have reduced substantially. (One bale weighs 170 kg.) Though the rating agency has put a negative outlook, it said if a substantial increase in India’s exports to China and other countries occur, it would result in stable outlook.

It also said a rebound in domestic mill consumption driven by a higher demand for Indian textiles at stable cotton prices above minimum support prices will lead to stable rating.

 
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