Tuesday, April 24, 2007

Chinese twist to Indian cotton

Indian cotton prices are gradually inching upwards since the beginning of February. Currently Shankar-6, a variety of long staple cotton, which was being quoted at over 54/Kg against Rs 57 on February 1. Looking ahead, the scenario appeared to be quite interesting, given the likelihood of a domestic bumper crop, together with a drop in the US & Pakistans' cotton output and higher imports of Indian cotton by mills in Pakistan, adding to it the uncertainity over the amount of imports from China this season, and the picture became even more intriguing.

As per estimates issued by the Cotton Advisory Board in December, 2006, India's cotton output will touch 27 million bales (1 bale = 170 Kg). Domestic cotton production has never been so high. Further, production can slightly better than expected following the third spell of rains in the cotton producing belts in Gujrat. This is likely to boost the bale formation phase of the crop, yielding more output/ hectare.

The East India Cotton Association has raised its production estimate for Gujrat from 9 million bales to 9.5 million bales takingthe total expected production to 27.3 million bales. It will be nearly 12% more than previous year's estimate. This is contrary to the initial market anticipation of an adverse effect of rain on production. The market was expecting a lower output of 25.5 million bales. Industry sources attribute a part of the recent increase in prices to thi belief. It is not easy to conclude that such a robust jump in output will draw down prices. There are several factors that turn the relationship between cotton output and prices into non linear relationship.

On the supply side, several large and small cotton traders are pilling up stocks in anticipation of higher prices. As per market sources, currently Cotton Cooperation of India & Maharashtra Cotton Federation together hold over 1.5 million bales of cotton. This is about 6% of the total cotton arrivals so far. This may keep prices firm in short term basis.

On the demand side, mill consumption in India is rising by over 10% nnually. It is expected to raise from 18 million bales last year to 20 million bales during the current cotton year. However, spinners may not find it feasible to pick up the produced at prevailing prices.

On the export front, demand from Pakistan is expected to rise. Pakistani mills are estimated to pick up 1.2 million bales this reason, compared to less than 1 million bales in the previous year. This year, the Chinese Govt has kept imports quota by the end of March. This will have a major impact on cotton exports and in turn, on the supply dynamics in India. Market sources feel that prices may stabilise for a while at current levels. However, these are likely to turn weak in coming months, as exports as well as domestic offtake may not be sustainable at current levels.
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