Notwithstanding the Union Ministry of Textile’s direction to the Cotton Corporation of India (CCI) to offload its stock only to micro, small, medium scale to (MSME) units in the wake of rising cotton prices, the rates of the commodity are not likely to fall sharply till the arrival of new crop in October.
“The recent government directive to CCI to sell its entire cotton stock to micro, small, medium scale spinning units will help contain the price rise of cotton. However, Ind-Ra believes that cotton prices will not see any steep decrease, till the arrival of the next cotton crop,” Mumbai-based financial institution India Ratings (Ind-Ra) said in a report.
Cotton prices have shot up by over 35% since May 2016. The fall in domestic production has spiked cotton prices, which are likely to remain at a high level of Rs 120-127/kg till the cotton season ending September.
The rise in prices is expected to squeeze profits of ginners and spinners by over 15% in the current fiscal. There may not be any sharp fall since prices already factor in the release of stock from inventory, Ind-Ra said.
Cotton prices are expected to be under pressure on likely fall in acreage. “Fear of losses from pest attacks and due to the lack of alternatives to biotech cotton hybrids, acreage (of cotton) is likely to decline. This may push up cotton prices further, however increasing demand for manmade fibre, will contain the price rise,” Ind-Ra noted.
Observing that increase in prices will impact small textile players the most, the report said ginners and spinners are most likely to be affected. However, some organised spinning units with interchangeability from cotton to blended yarn will be able to adapt.
“Profitability of pure cotton ginners and spinners will be lower by at least 15 %, on account of their inability to pass on this steep increase in cotton prices to their customers due to decreasing cotton demand and increased competitiveness of manmade fibre,” it said.
However, players who have stocked up cotton at lower prices in March-April 2016 are better placed. Further, fabric manufacturers are likely to be affected the least, on account of their better interchangeable use of looms, it added.