Cotton prices set to come under pressure as demand weakens, economy slows 

With demand weakening amid a slowdown in the global economy, cotton prices in the global market are set to come under pressure, experts have said. 

“There is no demand for yarn from spinning mills. They are losing about ₹30-40 a kg in yarn sales. But stocks are limited with them. This is stopping the price from falling at the pace it should have been,” said Anand Poppat, a Rajkot-based trader in raw cotton, yarn and cotton wastes.

“A higher level of inventory with retails globally in the slowing demand environment has created a sluggish trend across the value chain in textile manufacturing,” said Prabhu Dhamodharan, Convenor, Indian Texpreneurs Federation (ITF). 

11-year peak

US-based research agency Fitch Solutions Country Risk and Industry Research (FSCRIR) said it believes global cotton prices have peaked as “demand starts to weaken amid a slowing global economy with rising risks, while increased plantings and better weather for the next season are set to increase production”.

It said second-month cotton futures on the Intercontinental Exchange (ICE), New York, had increased from 111 US cents a pound at the start of the year to a peak of 155 cents on May 4 - the highest since 2011 when prices hit 203 cents. Prices are currently hovering around 125 cents. Fitch Solutions said it expects more weakness in the coming months, especially on increased production in India, the US, China, Pakistan and Brazil with the harvest season starting from August onwards.

Cotton futures on ICE for delivery in July are currently quoted at 143.45 cents (₹87,700 a candy of 356 kg), while cotton is on cash available at 134.14 cents (₹82,000). October and December futures are quoted at 125.14 and 118.29 cents. 

On Zhengzhou Commodity Exchange, cotton for July delivery was quoted at 19,510 Chinese yuan a tonne (₹83,125 a candy), while September futures ruled at 19,555 and November at 19,285 yuan, respectively. 

No buyers, sellers

In contrast, Indian Shankar-6 cotton, the benchmark for exports, is quoted at around ₹95,000. On the Multi-Commodity Exchange, the July contract is quoted at ₹46,330 a bale of 170 kg (₹97,020 a candy).  

“There are neither buyers nor sellers at these prices,” said Poppat. 

Usually, Chinese cotton prices rule higher than Indian cotton rates. But now they are ruling lower than the Indian price. It is a fair indication of how things will pan out over the next few months, said the Rajkot-based trader.  

“We are expecting 3-4 months of demand contraction which will only lead to the softening of prices and then trade will return to routine business with the exhaustion of inventories. We need to work in the normalised demand environment like the pre-Covid period in the subsequent quarters,” said ITF’s Dhamodharan. 

Bull-whip effect

FSCRIR said the elevated price for cotton has increased producers’ confidence, leading to higher cultivation globally. In China, government initiatives will also provide confidence to growers. 

“We are confident of cotton prices correcting to normal levels in the upcoming cotton season,” said Dhamodharan. 

Poppat said the difference of 25 cents between July and December futures was high and prices of December could rise to 120 cents. 

Dhamodharan said: “Even a 10-15 per cent drop in demand and 15-20 per cent higher production which is very much possible can create a bull-whip effect and bring down cotton prices to nominal levels in the upcoming cotton season.”

On-call sales

The other factor that could impact prices is that nearly 121,015 US cotton bales, equivalent to 1.61 lakh Indian cotton bales, have been sold by traders in short positions.  The feature of “on-call sales” is that a buyer purchases cotton from a seller or speculator without fixing the price and buyers usually look to settle the contract when prices rule low. 

Meanwhile, 9.5 lakh tonnes of cotton have been imported till now. The Centre has allowed the import of cotton duty-free until September 30 to help the industry get quality cotton and tide over the supply issues.

Imports were also allowed to cool down domestic prices which had surged past a record ₹1,00,000 a candy in May this year. In particular, the textile industry had complained of a shortage of quality cotton. 

Indian cotton’s quality was affected by unseasonal rains during October-November last year. The rains also resulted in output estimated being lowered from 360.13 lakh bales in October to 315.32 lakh bales by the Cotton Association of India. 

Cotton prices had surged to an 11-year high this year on lower global production and higher demand this year. But the Russia-Ukraine war and the resulting inflation due to a flare-up in energy prices have dampened demand and the textile sector’s outlook.