Cotton prices in India likely to face headwinds: Ind-Ra

To improve the cotton supply and stabilise prices, the government removed the import duty on cotton (from 10 per cent to nil) in April 2022 up to September 2022. In May 2022, average cotton prices stood higher by around 10 per cent month on month (MoM) and around 90 per cent year on year (YoY), with Indian cotton being more expensive than international cotton.

However, Ind-Ra does not expect a sharp correction in the cotton prices until the next Indian cotton season starts (October-September), supported by strong fundamentals. The domestic cotton production was lower 16 per cent YoY in the current Indian cotton season up to May 2022, leading to a supply shortage amid a sustained global demand, led by the US ban on Chinese Xinjiang cotton. Hence, Ind-Ra expects the prices to remain elevated over the medium term compared to pre-COVID levels.

The manmade fibre (MMF) fibre prices may increase over the medium term, owing to an expected rise in raw material prices driven by the US and European Union ban on Russian oil imports amid aggravating geo-political tensions on the Russia-Ukraine war. The prices shall also be supported by a higher substitution demand amid elevated cotton prices over the medium term, Ind-Ra said.

Ind-Ra expects higher demand substitution by MMF products due to the rise in cotton prices over the medium term. While both cotton and PSF prices have increased, cotton-PSF spread increased by 27 per cent MoM and around 400 per cent YoY in May 2022, making cotton-based products much more expensive than synthetic fibre/MMF based products and thus supporting demand for MMF products.

The domestic cotton yarn prices are expected to moderate over the medium term, led by a demand push back from downstream players and end-users, Indian weavers importing cotton yarn from Vietnam in June 2022 amid domestic prices being higher than international prices along with partial demand substitution by MMF yarns. Average cotton yarn prices stood 2 per cent MoM and 31 per cent YoY higher in May 2022, fuelled by consistently increasing input prices partly countered by the reduction in the production considering resistance from spinners. The spot spreads (cotton yarn - raw cotton) increased 18 per cent MoM up to ₹86 per kg in May 2022. However, with the expected decline in cotton yarn prices, the spreads may decline for spinners unless raw cotton prices decline in the same proportion, the agency said.

Ind-Ra expects the production of cotton-based fabrics to moderate on high input costs while that of polyester/viscose-based fabrics to remain steady or improve over the medium term. Increased raw material prices have created uncertainty among players as it could lead to a decline in the margins for downstream players, especially in cotton if they are unable to pass on the price increase on a demand slowdown from end-consumers which is already being witnessed.

With rising infections in China, the country’s market share in US apparel imports reduced to 16.75 per cent in April 2022 (FY22: 24 per cent) while that of India increased to 7.42 per cent (FY22: 5.33 per cent). Also, while the overall quantity of US apparel imports declined 14 per cent MoM in April 2022, the quantity of imports from India reduced only 6 per cent MoM, indicating a lower impact on India’s exports.

Relative export competitiveness for Indian cotton terry towels and cotton bedsheets weakened in 4M22 (January to April 2022) on elevated raw material prices rendering Indian products more expensive than that of other exporting nations. Thus, over 4M22, India’s market share in US imports of cotton terry towels reduced to 39.20 per cent (2021: 43.84 per cent) and that in US imports of cotton bedsheets reduced to 53.01 per cent (57 per cent). Ind-Ra believes the situation may not restore/improve drastically at least till the new cotton season arrives.

ALCHEMPro News Desk (KD)