Textile margins likely to increase

Global cotton prices fall sharply as China restricts imports.

KARACHI: A sharp decline in cotton prices in the first three months of the current fiscal year has jolted the value chain of the textile sector. However, it is gradually bringing the sector in the limelight as margins of textile companies are expected to increase in coming months.

The cotton season from August to December started off on a bearish note with the drop in prices, which came after a major shift in Chinese cotton import policy for 2015 and higher production estimates by India, research house BMA Capital reported on Wednesday.

International cotton prices have dropped to their lowest levels in five years as China –the largest cotton importer – is expected to restrict purchases in 2015. In a new import policy, China will encourage its industries to consume local cotton as stocks have piled up sharply over the last few years.

The global market slowdown is also influencing prices in the domestic market despite the damage to the crop in recent floods. Prices have come down and are standing in the range of Rs5,200 to Rs5,500 per maund.

According to preliminary estimates of Suparco, the floods have hurt the standing cotton crop over 300,000 acres of land where 2 to 2.5 million bales are estimated to have been swept away.

Resultantly, the cotton production target of 15.5 million bales for fiscal year 2014-15 is likely to be missed and the harvest could be around 13.2 million bales, still higher by 3% than last year’s output.

However, yarn prices have remained relatively stable and may lead to an improvement in margins.

Spinning margins, which saw a declining trend in the second half of fiscal year 2013-14, recovered rapidly in the first quarter of current year, said Sherman Securities in a report.

At a time when fresh cotton is arriving in the domestic market and spinners are busy making purchases, international cotton prices have decreased by an average of 19% in the first quarter compared to the fourth quarter of 2013-14.

Similarly, local cotton prices have come down 15% quarter-on-quarter.

China consumes 7.5 million tons of cotton per annum and has so far imported 1.88 million tons during 2014. However, due to excessive stocks, it is expected to allow the mills to import only 894,000 tons in 2015. More imports may attract imposition of 40% duty.

“In this scenario, there is little doubt that the sharp fall in cotton prices may lead to some inventory losses. However, we believe that margins of the spinning segment may improve,” Sherman Securities added.

Published in The Express Tribune, October 2^nd, 2014.

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