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India Ratings expects domestic cotton prices to stabilise at the current low levels or decline by 5—10 per cent in 2013.
The ratings agency maintained a negative outlook for the cotton sector.
The negative outlook is driven by increased margins pressures exerted by the global inventory build-up of these agricultural commodities, the ratings agency said in its report here.
“We expect domestic cotton prices to stabilise at the current low levels or decline by 5—10 per cent in 2013. The current global cotton inventory is at a multi—decade high, with stocks to usage ratio estimated to be at 71 per cent,” India Ratings said.
Around 50 per cent of this global inventory is in China.
The way the Chinese policy makers decide to handle the close to 9 mt cotton inventory is the single largest event risk in the world cotton market. Additionally, global production levels staying significantly above the current global cotton consumption levels may pull cotton prices down.
The credit profile of major cotton traders would be driven by their ability to handle inventory. To the extent traders keep their inventories days low by entering into back—to—back contracts with producers and consumers, they would remain less affected by any significant downside in cotton prices. However, margin pressures are likely to continue for such players.
India Ratings has also maintained a negative outlook for the Indian edible oil sector for 2013.
Favourable weather conditions caused palm oil production to significantly outstrip muted global demand in the 2011—2012 palm season (November—October). As a result, inventory surged, with the current global stock as a proportion of usage estimated to be at a six—year high.
Global palm oil prices have fallen in the range of 25 to 28 per cent (USD terms) over the last 12 months, with Indian prices mirroring a similar trend with a lag. Regulatory interventions by major palm oil exporting nations are unlikely to address the price pressure, if global demand does not pick up, the report said.
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