High cotton prices to hit yarn producers

High cotton prices on the back of low arrivals are set to hit spinners even as yarn demand falls in the export market.

Cotton yarn exports are under pressure due to lower demand from China, the largest importer of yarn from India.

Though cotton prices have fallen since the beginning of the harvest season, it is still 17 per cent higher compared to the same period last year due to the hangover of the shortage faced last year.

This apart, cotton arrivals have slowed after demonetisation of high-value currency last month and uncertainty related to the extent of improvement in the domestic crop-size estimate.

Jayanta Roy, Senior Vice-President, and Group Head, ICRA, said the fall in export demand for cotton yarn is a major challenge for spinners here as the industry has been exporting a third of yarn produced for the last four years.

In the last seven months of this fiscal year, cotton yarn exports have fallen 23 per cent as China has been pushing its mills to consume cotton produced domestically to reduce dependence on imports.

China’s overall yarn import declined 20 per cent in seven months of this fiscal year, with a 54 per cent fall in purchases from India.

“While the impact of the sharp fall in exports has been cushioned by an estimated recovery in domestic consumption, a sustained revival will be challenging due to the adverse impact of demonetisation on disposable income and consumer spending.” said Roy.

At 1.1 per cent, Yarn production registered the lowest growth in four years in the first half of this fiscal year while cotton yarn production fell 1.8 per cent during the same period last year.

With the fall in demand, spinners have to cut down on capacity utilisation, which is likely to put pressure on their profitability.

Apart from lower profits, the high cotton prices will translate into higher working capital requirements, leading to higher borrowings and weaker credit metrics of players, said ICRA.