India Cotton May Trade In Narrow Range Next Week

MUMBAI (Commoditiescontrol) – Cotton declined in most market across the country during the week ended Saturday due to poor off take by mills and uncertain future outlook.

Cotton prices in North India went down by between Rs 80-90/maund (37.3kg each) in various market of Punjab, Haryana and Rajasthan this week, while natural fibre lost its shine by Rs 800/candy (356kg each) in Gujarat. The largest fall of Rs 1,500/candy witnessed in Maharashtra while Rs 500 weakness was seen in Karnataka.

However yarn prices ruled mostly flat in the domestic market tracking strong international market. However, cotton yarn will find stiff competition from synthetic yarn as the same has witnessed some correction after sharp slump in crude oil this week. Crude oil has slipped about 20 percent since early June, ending a recovery that saw prices almost double from a 12-year low in February.

Demand in cotton is poor by domestic mills amid reduced consumption after many mills across the country has opted to consume less of the natural fibre to avoid huge losses. The spurt in domestic cotton prices, which have surpassed international rates, had adversely impact yarn demand and profitability of spinning companies in the country.

The spurt in cotton prices is beyond expectations and points to a severe shortage of cotton in the domestic markets, which also later on fueled by reports of lower sowing intention and drop in cultivation area.

However with constant rise in cotton prices has made domestic mills uncompetitive and poor demand in yarn from domestic and overseas market has started showing effects at the higher level since early last week, July 18 and since than cotton prices corrected by over 7 percent.

But tight supply-demand balance sheet had now provided some support at the current level with decline in sowing area. Cotton cultivation in the country as on July 28 dropped 9.41 percent at 92.33 lakh hectares versus 101.91 lakh hectares last year, according to agriculture ministry (Full Report).

The data revealed that cotton acreage plunged sharply by over 43 percent in Punjab, followed by 26 percent in Telangana, 14 percent in Haryana and 13 percent in Gujarat.

Cotton crop in most parts of the country is mostly favorable especially in North India, Maharashtra, Madhya Pradesh and South India. However, crop in Gujarat, largest producer in the country, are under stress due to rainfall deficit. The state has so far received 48 percent less than normal rainfall.

Saurashtra is the key cotton producing region in Gujarat and accounts more than 75 percent of area. As per latest India weather office report 5 districts out of 8 in Saurashtra regions have received deficit monsoon and remaining scanty rainfall witnessed in rest 3 districts, which is major cause of concern.

According to Gujarat agriculture ministry sowing data, cotton has been cultivated in around 16 lakh hectares in Saurashtra regions from total 20 lakh hectares in the state as on July 25.

A senior officials, who did not wish to be named, pointed out that overall output in the state may drop to around 65 lakh bales from 94 lakh bales in the previous year due to scanty rainfall.

According to KR Kranthi, director of Central Institute of Cotton Research, the overall production could touch 300 lakh bales as against last year’s 338 lakh bales. Some industry experts have sounded an alert over the possible re-appearance of the pink bollworm in Gujarat by October-November due to late sowing.

International Market
ICE cotton futures recorded nearly 2 percent gain this week supported by weak dollar and concern about crop in west Texas amid dry weather. Volume and open interest rose 14 percent and 0.4 percent respectively, indicating fresh long position. December delivery contract resistance placed at 75 cents/lb, while support at 70.99.

According to the latest CFTC report as of July 19 speculators were 9.3 million bales net long, up 1.3 million bales from the week before, and they still have room to grow this position by a million bales or two before it reaches record levels.

U.S cotton prices in the long run likely to trade bullish supported by expectation of strong surge in demand amid prospects of lower production in India.

India is likely produce 300 lakh bales (170kg each), which will mainly consumed locally and hence the global requirement of cotton is likely to met by U.S.

China cotton market declined a tad at 14,795 yuan per tonne ($2,228.30) against previous close of 14,780 yuan per tonne ($2,226.04).

China state reserve cotton selling continued at a furious pace at higher prices, indicating that Chinese demand may still be underestimated even after the USDA has raised its number by 1.5 million bales a couple of weeks ago. The average auction price is currently at around 102 cents, while the CC-index has risen to nearly 105 cents/lb!.

China has auctioned off around 1.6 million tons or 7.3 million statistical bales so far and there are rumors that auctions might continue beyond the scheduled 2.0 million tonnes. Since Chinese raw cotton imports are already at 0.86 million tonnes with one month remaining in the marketing year, this suggests that the production gap might be bigger than the 2.94 million tonnes the USDA currently estimates, according to Plexus-Cotton.

Conclusion
India cotton prices may trade in narrow range next week with market participants closely watching weather development in cotton growing regions, especially in Gujarat. India cotton and textile competitiveness in the world market is likely to severely hurt going forward as domestic cotton price difference with China and Cotlook Index A has narrowed significantly (see below chart). Historically India cotton prices remains discount to U.S and China, but now it is around 2 cent/lb premium over U.S cotton and difference with Chinese cotton has narrowed substantially. The current trend of Indian cotton prices in unfavorable of textile sector and incase this trend prevail prolonged that the consequences will be severe.



(By Commoditiescontrol Bureau; +91-22-40015533)