High cotton prices erode textile industry profits

Foreign news on June 22 was that the double blow of increased freight costs and rising inflation caused the price of cotton in India to rise by more than 30%, from 35,829 rupees per bale to 46,700 rupees. Analysts believe that this is slowly eroding the profits and sales of the textile industry. In addition, analysts expect demand for products to weaken in the near term as rising interest rates distort consumer purchasing power.

India is the second largest cotton producer after China, accounting for 25% of global production. Global cotton demand has shifted towards India in the past few months.

Yarn and fabric prices have risen in line with the rally in the international market, leading to suspension of production in Indian spinning mills. According to a report by IndiaRatings, nearly 10% of the 2,100 spinning mills in southern India have closed because they cannot afford locally produced cotton. The same report shows that the average operating rate of spinning mills in Kupang and Ludhiana is less than 50%.

Analysts expect that rising cotton prices will continue to trouble small spinning mills in the first half of fiscal 2023. However, a correction in cotton prices after a good monsoon may paint a different story for the spinning industry later in FY23. Gaurang Shah, chief investment strategist at Geojit Financial Services, said that domestic cotton prices are expected to cool down after a good monsoon season; however, the cotton textile industry may experience fluctuations in the near future.

Nevertheless, the area planted to crops this season decreased by 8% compared with the same period last year. As the delayed monsoon may lead to lower crop yields, the Cotton Association of India (CAI) has lowered its cotton production forecast for this year to 31.532 million bales (170 kg per bale), a decrease of 831,000 bales from the previous estimate.

In order to cool down cotton prices and boost domestic demand, the government increased the minimum support price (MSP) of cotton by 6.18% to 6,080 rupees per quintal, and Restrict exports until domestic demand is met.

Despite the government’s efforts, analysts still speculate that profit pressure in the textile industry is still approaching because companies are unwilling to fully pass on price increases to consumers. . Shah added that although cotton prices have been supported by the government’s increase in MSP, which can give farmers some relief, the cost passed on by textile mills to consumers must be paid attention to.

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