Domestic cotton prices will stay under pressure in FY17 as volumes are unlikely to match Chinese demand, said India Ratings and Research (Ind-Ra). The rating agency has maintained a negative outlook on the cotton sector for FY17. The rating agency on Tuesday said the continuation of Chinese direct subsidy-based policy and lower demand from spinning mills will keep domestic cotton prices under pressure.
Though Bangladesh, Pakistan and Vietnam have replaced China with India as a supplier, volumes are picking up at a slow pace and are unlikely to match Chinese demand. The operating margins will stay in the 1-2% range for ginners and traders, but the profit after tax margins may improve as sector companies reduce stocks and focus on receivables management. International cotton prices, however, will remain sensitive to the release of cotton by China from its cotton reserves, which estimates to be around 59% of global cotton stock at FYE16.
According to Ind-Ra, Chinese cotton reserves will directly impact the quantum of imports in that country and consequently the global stock levels outside China.
The cotton industry is likely to revive moderately in CY17 as exports to Vietnam, Pakistan, and Bangladesh grow. Vietnam is likely to increase its spindle capacity by 30% in FY17. The local cotton production in Pakistan and Bangladesh is unable to keep pace with the increasing demand for apparels from these locations, providing opportunities to Indian exporters.
However, the report said that in view of China reducing imports significantly and the moderating demand from the Indian spinning mills industry, it is believed that the demand for cotton will increase at a marginal rate in CY17 and the prices are unlikely to increase materially from the current levels.