India: Low cotton prices, weak rupee to help spinning mills

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Spinning mills are expected to do well in the coming quarters due to low cotton prices and an almost depleting inventory of textile companies in the entire value chain of this business.

In the past six months, most textile companies have been coping with low demand by procuring inventory only for shortterm consumption. The losses borne by them last year due to a high inventory convinced textile companies to dispense with their existing inventory and procuring inventory only for a crucial short-term period. Such a cautious approach across the high-end of the value chain was due to a growing expectation among buyers of a further fall in raw material prices. But the scenario has changed. Most textile companies across the value chain do not have a strong inventory in the pipeline.

There is an expectation of moderate growth in demand from the high-end of the value chain–chiefly companies, which are into manufacturing of fabrics and garments.

As opposed to this there are constraints on the supply side of the business. States such as Tamil Nadu and Andhra Pradesh, which are two prime bases for 60% of the country’s spinning capacity, are reeling under a power supply shortage. Industry veterans reckon that the production of yarn will be impacted because of this. However, this will result in an increase in the prices of yarn, which in turn would benefit spinning mills companies.

Recently, cotton yarn prices hit a new high of Rs 280 per kg, while cotton yarn prices are nowRs 190-200 per kg, an increase ofRs 5-10 per kg in the past 15 days. Also, cotton prices have declined by 10.5% to Rs 34,000 per candy (Shankar-6 variety) in the past 15 days. Sanjay Jain, managing director, TT, says that the supply has come down by 30-30%, while demand is growing moderately.

This, according to him, could give better revenue visibility for spinning mills in the coming quarters, especially from the March quarter of this fiscal. Another major factor that would work in favour of spinning mills is theweak rupee. It is estimated that more than 25% of the yarn produced is exported.

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Recent data released by the Directorate General of Foreign Trade show there is a sharp improvement of 76% in quantum of contract for export of yarn in the past one month to 76.3 million kgs in November on a sequential basis. With retail sales in the US improving, spinning mills are expected to benefit considerably.

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