Rising prices may hit cotton firms' scrips
Aaron Chaze
Cotton yarn manufacturers may find the future bleak as a crop of reasons has made the going tough for them. One, the equity markets have been eagerly awaiting news from the cotton market on the total supply position of raw cotton.The general expectation has been that the total production of cotton would be marginally lower or somewhere close to last year's output of 17.6 million bales. Cotton prices have already started moving up in anticipation of a lower output, and the news of the destruction of the crop in Punjab and Andhra Pradesh has only added to the price rise. The latest reports say that cotton production is below last year's level and is closer to 16 million bales. The industry, which benefited from a 5 per cent fall in cotton prices last year, could be looking at a diametrically opposite situation this year. The industry benefited tremendously from the export market in the first half of the current year as the international demand remained very buoyant for Indian cotton products
(particularly yarn), and most of the leading companies reported a 50 per cent increase in profits on an average. As cotton is a seasonal crop and physical deliveries are available only once a year from October to February, the ability to carry physical stocks becomes a very important factor in determining profitability, and interest rates play a very vital part for the rest of the year. In fact, a number of cotton yarn export-oriented units (EOUs) have gone in for external commercial borrowings (ECBs) in recent months as it has helped reduce both holding costs and the cost of capital. Besides, even for those companies that have not gone in for ECBs, the domestic interest rates in the last few months happened to be extremely low and the benefits were clearly reflected in the half-yearly earnings statement. Barring the last quarter of the current financial year and the six months thereafter, that benefit may soon dry up. Apart from this, the competitive level of the rupee vis-a-vis the currencies of
the neighbouring cotton producing countries will influence export demand. And the domestic policy towards export quotas of raw cotton in turn influences local prices. Last year, 1.7 million bales of raw cotton were exported but in the current year the expectation is that less than 0.7 million bales will be exported as prices are anyway expected to be adverse. The impact of the price situation in the domestic blended textile industry has already been felt on the cotton sector. With the prices of polyester derivative products tumbling sharply in recent days, the mix of polyester and cotton blends has already dropped from 60:40 in favour of polyester to 70:30. According to polyester industry sources, on account of a further drop in polyester prices there is nothing sacrosanct about these levels as well, thus, it can further affect demand for cotton from these sectors. But in order to maintain their export commitments, Indian yarn companies will have to resort to higher levels of imports of raw cotton,
particularly the long staple variety (it is of a higher quality and needed for export quality products, though last year imports were much lower). Despite the fact that imported cotton does not carry any import duties, these manufacturers will have to contend with a 15 per cent depreciation in the rupee. So, in effect, the industry will suffer from a squeeze in margins from now on. The impact is already being felt, even on those companies that performed very well in the first half of the current year. Leading cotton textile companies like Maral Overseas, GTN Textiles, Vardhaman Spinning, Mahavir Spinning, etc have already begun to see a negative impact on their respective stock values which are falling to new lows. The only exception to the trend being Malwa Cotton.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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