Textile Industry Update
Staring at a supply glut: Challenging times ahead for the Indian cotton sector
Cotton prices in India are witnessing a consistent fall for the past few months. The fall in prices can be
attributed to the expected record harvest this season owing to increased acreage, subdued demand from
the domestic mills and fall in export demand from the top buyer China. India’s bumper crop, rising
international inventories and subdued demand from China is likely to drive the cotton prices further
down.
November 2014
Indian Cotton: Growth story
Over the past few years, India has achieved significant growth in cotton production. About a decade ago,
India was barely self sufficient to meet its cotton requirement but is now poised to overtake China to
become the world’s biggest producer of cotton this year. Since the year 2000, the country has achieved
substantial growth in yield and production on the back of the slew of measures such as development of
high yield varieties, appropriate transfer of technology, improved farm management practices and
increased area under cultivation of BT cotton hybrids among others. India’s cotton production has grown
from 14 million bales (bales of 170 kgs) in 2000-01 to 37.5 million bales during 2013-14. The growth in
cotton production is driven by increase in area under cotton cultivation as well as growth in yield. The
area under cotton cultivation in India has increased from 85.76 lakh hectares in 2000-01 to 115.53 lakh
hectares in 2013-14, while yield has grown from 278 kgs per hectare to 518 kgs per hectare during the
same period.
Source: Cotton Advisory Board (CAB)
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Textile Industry Update
During the current year (2014-15), the area under cotton cultivation in India has further increased to reach record
level of 125 lakh hectares. There has been sharp increase in cotton acreage in Gujarat, Maharashtra, Karnataka
and Andhra Pradesh. In the current year, India had witnessed lower than normal monsoons early in the rainy
season, which propelled many farmers to switch to planting cotton, which needs less water to grow, leading to all
time high cotton acreage of India. In addition to that, owing to the heavy rains during the end of the monsoon
season, India is expected to have a bumper crop this season. All time high acreage coupled with expected bumper
crop is all set to push India’s cotton production to a new level. Indian Cotton Federation (ICF) estimates a record
harvest of 40 million bales during 2014-15, a growth of about 8% over 37.5 million bales in 2013-14.
Demand Scenario: The other side of the story
Currently, the demand for cotton from domestic yarn mills is on the lower side on account of the higher domestic
cotton price as compared with international prices coupled with lack of quality cotton worth spinning as well as
existing high inventory with yarn mills.
Owing to the delayed sowing due to delayed monsoon during current season, arrivals are expected to delay by a
month or two and good quality cotton is expected to come in late November or early December. In addition to
that, mills already have inventory from last season's stock, which is resulting in lower demand for cotton in
domestic market.
Slowing export demand
The demand for cotton in international market is sliding, which can be largely linked to China’s new cotton policy,
as China constitutes about 60% of the India’s cotton exports. Cotton export from India is estimated to fall from
high of 11 million bales in 2013-14 to 6-7 million bales in 2014-15.
*estimated, Source: Cotton Advisory Board (CAB)
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Textile Industry Update
Policy change in China and its impact
To boost demand for domestic cotton, China, the world's top consumer of cotton, will slash its import quotas for
2015. China will provide import quotas next year only for the 894,000 tonnes that it is required to offer at low
duties under commitments with the World Trade Organization (WTO) and no additional quota would be made
available as it was made previously. Non-quota imports are subject to a 40% tariff, so the restricted availability of
import quotas will dampen Chinese demand for foreign cotton and the same will hurt Indian exports.
The Chinese government will also end the three year long program to stockpile domestic cotton to support local
growers and instead offer subsidies direct to farmers. The stockpiling in past had pushed the price of domestic
cotton well above market prices, creating demand for cheaper imports. As the Chinese government offloads its
three year reserve stock of cotton, mills will get access to cheaper cotton from the local market and the same will
reduce their dependence on imports. So, China is unlikely to be an aggressive buyer this year and its imports are
expected to decline significantly.
Impact on cotton prices
Considering a record cotton crop coupled with the unfavourable export markets, the domestic cotton prices are
likely to slide. The cotton prices have already fallen below minimum support price (MSP) of Rs.35,000 per candy
(356 kg).
There have been almost zero forward deals with exporters this season. With China reducing its imports and
international prices still being lower than the domestic prices, demand for cotton in terms of exports will be low.
This anticipation is also resulting in fall in cotton prices.
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Textile Industry Update
Overall impact on Textile industry
The Indian textile industry occupies a significant place in the country’s economy providing employment directly or
indirectly to around 35 million people. Cotton is a major raw material for the Indian textile industry, constituting
about 65% of its requirements and is primarily used by the textile industry to produce thread, fabrics, linen and
apparel.
The international cotton prices have continued to fall since the end of the last season owing to the rising
international inventory. The fall in the international cotton prices and weakening global demand for cotton is
likely to impact overall demand scenario and prices in the domestic market as well. The domestic cotton prices
have already gone below the MSP and are likely to slide further with the expected bumper crop.
The cotton prices play a key role in yarn prices as raw cotton forms around 55% to 60% of cotton yarn cost causing
yarn prices to generally move in tandem with the cotton prices. The consistent fall in the cotton prices has already
started impacting yarn prices, which are also witnessing a fall. Cotton yarn prices have declined about 4% to 6% in
the month of October 2014 and about 7% to 8% in three month period from August 2014 to October 2014 across
categories. The fall in the yarn prices and weak realizations are expected to adversely affect the operating
performance of the spinning mills, which are carrying high cost cotton/cotton yarn inventory from last season.
Furthermore, if the yarn prices continue to remain soft and exports decline, the Indian spinners may witness
higher inventory levels, which may also impact their profitability. Cotton yarn exports from India are expected to
decline if demand from China continues to be low. The fall in demand from export market will also impact the
capacity utilization levels of the Indian spinning mills, which will further put pressure on profitability.
Outlook
Falling international demand and prices of cotton will have an impact on domestic yarn prices too. In the short to
medium term, on the back of the expected record production of cotton and subdued export demand the cotton
prices are expected to remain soft.
China is the biggest consumer of the Indian cotton and with China cutting its cotton imports, India may have to
look for other markets for its production. Countries like Bangladesh, Vietnam and Pakistan can be potential
importers for the Indian cotton.
The role of the Indian government also becomes significant in this scenario with its intervention in terms of buying
cotton at MSP for sustaining the prices. The record crop has already forced the Indian Government to start buying
cotton at MSP from the market and it may have to procure about 8 million to 10 million bales of cotton at MSP
during the current season to support the prices as compared to 40,000 bales which it purchased last season.
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Textile Industry Update
Rating dispersion of textile companies rated by CARE
CARE has outstanding ratings in textile sector for 535 entities, the rating distribution of which is given in the
following graph. CARE’s Modified Credit Ratio (MCR) for textile sector for FY14 and H1FY15 was 1.27 and 1.34
respectively which signifies improving credit quality of the rated entities during the period. Considering the
challenges faced by the textile industry, the sustainability of these improvements remain to be seen.
Contact:
Gaurav Dixit
Assistant General Manager
[email protected]
+91-11-4533 3235
Pravin Agarwal
Manager
[email protected]
+91-11-4533 3203
Disclaimer
This report is prepared by the Ratings Division of Credit Analysis & Research Limited [CARE]. CARE Ratings has taken utmost care to
ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the
accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or
omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states
that CARE Ratings (including all divisions) has no financial liability whatsoever to the user of this report.
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