MUMBAI (Commoditiescontrol) - Cotton consumption by Indian textile mills and spinners declined 3.97 percent to 24.86 lakh bales (170kgs each) in December 2015 compared to 25.89 lakh bales in the corresponding month of 2014-15, as per a provisional data by Textile Commissioner.
Prolonged weakness in crude oil prices due to concerns about oversupply in global market, is acting as the major obstacle in the way of growth of cotton demand.
In December 2015, average level at which crude oil was traded was $37/barrel compared to $53/barrel during December 2014, down nearly 30 percent.
According to Mr. Arun Dalal, a veteran trader from Ahmedabad, in response to lower crude oil prices, textile mills shifted to synthetic fibres like polyester from cotton yarn.
Given the tepid demand in cotton yarn, production of yarn also slumped over a period of time. Mills do not have much funds as they are not confident in borrowing fund in credit from banks tracking the current volatile situation in the market.
Another reason for the fall in consumption is the disparity faced by mills due to imbalance between yarn and bales prices.
Average price of hank yarn in December 2015 was Rs 224.75/kg, down 3.22 percent from Rs 232.24/kg in December 2014. Similarly, cone yarn was trading at an average price of Rs 177.82/kg in the month compared to Rs 188.43/kg in December, 2014, a fall of Rs 5.61 percent. And hosiery yarn was trading at Rs 200/kg, down 2.2 percent from Rs 204.50/kg same month last year.
On the contrary, bales prices showed an increasing trend during the two comparing periods. In December, 2015, average level for bales price was Rs 33,500/candy compared to 33,100/candy in December, 2014, an increase of 1.2 percent.
Enquiry in cotton yarn from exporters was also impacted as India has to some extent lost competitive advantage against peers such Vietnam as Vietnam has benefited from duty-free access under the EU-Vietnam free trade agreement (FTA), and also with the U.S upon the passage of Trans-Pacific Partnership (TPP).
Yet another factor which is disturbing the overall business chain is worry over Chinese demand due to uncertain economic situation in the country.
To add that up, Chinese government is likely to sell its reserve cotton sometime in March, detail plan of which it may announce after the Lunar New Year holidays.
China’s decision to auction cotton stockpiles remains a key risk to the direction of cotton prices.
There are strong rumors in market that China would also sell its cotton in international markets.
All these reports are hinting towards a possibility of the world’s net cotton importer to become the net exporter of the commodity.
Furthermore, Indian currency was observed to be less vulnerable to global economy meltdown when compared to China’s yuan and other major currencies in the world, making Indian cotton uncompetitive in international markets.
China, being India’s competitor in textile now has an added advantage in terms of pricing as its currency has been depreciating for the last few months. India had a cost advantage compared to China where labour cost is high, but now it is getting offset due to the depreciation in the currency, yuan.
Adding to the disappointment, India Ratings remains firm on its negative outlook for cotton sector in 2016-17. It says continuation of China’s direct subsidy-based policy and lower demand from spinning mills would keep domestic prices pressured next fiscal.
Though Pakistan, Bangladesh and Vietnam have emerged as major importers of Indian cotton, the volumes are unlikely to match that of Chinese demand.
The research agency concludes that international cotton prices will stay pressured after China releases reserve cotton, which is likely to be around 59 percent of global cotton stock at FY16.
(By Commoditiescontrol Bureau; +91-22-40015522)
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