Cotton prices have slumped in India and Pakistan over the last few weeks as mills had stockpiled goods in a precautionary measure.
This story first appeared in the May 24, 2011 issue of WWD. Subscribe Today.
The wavering of supply and demand has resulted in calls for government policy reform in India and mills closing in Pakistan.
After months of record-high prices, the cost of Indian cotton has fallen 25 percent in the last month. In mid-May, cotton in India — the world’s second largest supplier behind the U.S. — was selling at 44,000 rupees, or about $979 at current exchange rates, per 365 kilograms from 58,800 rupees, or about $1,290, a month earlier. Similarly, the prices of raw cotton and cotton yarn have fallen about 33 percent in Pakistan and importers are waiting before renegotiating new contracts.
In the U.S., cotton prices have also stabilized somewhat, falling about 18 percent to $1.51 a pound on Friday from $1.84 a month ago, but that’s still more than double the price of a year earlier.
“The U.S. cotton belt is facing a range of adverse growing conditions, including drought in Texas, floods in the Mid-South, and dry conditions in the Southeast,” Cotton Incorporated’s May newsletter said. “While weather will continue to affect the supply outlook in coming months, the most difficult questions facing the cotton market likely come from the demand side of the balance sheet. These questions come not only from the effects of decreasing prices…but also from the fact that higher retail prices have yet to completely materialize and it remains unknown how consumers will react.”
In India, textile manufacturers have been lobbying the government for months urging export bans of raw cotton and cotton yarn in a bid to cool domestic prices. A current cap on the amount of cotton that can be exported, 5.5 million bales in the 12 months that began on Oct. 1, has already been shipped, leading to calls for more exports from traders.
There are also international calls for India to allow greater exports of cotton, in particular to China and Pakistan, countries where poor weather destroyed crops.
Indian trade secretary Rahul Khullar said this month that a ministerial panel will decide whether to allow more cotton exports, although the textile ministry has argued that more exports will harm fabric mills, which have said their margins suffered when cotton prices were high and the drop in costs will allow them time to recover.
“As an apparel mill, we are happy prices have come down,” said Amer Hameed Khan, director of operations at knitwear mill Masood Textiles.
At U.S. Apparel, a jeans manufacturer in Lahore, Pakistan, senior vice president Zaki Saleemi said the company is expecting lower cotton prices next month. As a precaution, it is doing more made-to-order than stock service and reducing inventories to combat price volatility.
Khan estimated that most importers are biding their time and watching cotton prices settle before negotiating for competitive prices for finished goods, while others are requesting discounts.
The expected cost of the new cotton crop is $70 to $76 per 170-kilogram bale this July compared to $59 last July.
Analysts predicted a dearth of cotton this spring and yarn mills stocked up on cotton and some invested in surplus yarn to ride this time through, Khan said. But China curtailed cotton, yarn and gray fabric purchases in March to curb inflation. Mills that didn’t have the muscle to hold the additional raw material panicked. The local cotton price per maund (37.324 kilograms) fell from a high of $165 on March 8 to the current rate of $95, Khan noted.
Some 30 percent of Pakistan’s yarn output that was exported, 44,000 tons monthly, has been reduced to 16,000, said Samir Saigol of Azam Textile and Saritow Spinning Mills in Lahore. In addition, fabric mills also stopped buying yarn due to lower demand.
Yarn prices have fallen even lower than raw cotton, with carded yarn decreasing in price $176 per 100 pounds from $247 in February to now, according to Khan.
“It has gone from feast to famine for us at yarn mills,” said Saigol.
More than 80 yarn mills have completely shut down since April, whereas others are running on partial capacity.
According to U.S. Department of Agriculture estimates, Pakistan will produce 2 million more bales of cotton than last year — 13.1 million to 11.1 million — and consume only 0.6 million bales more.
“Manufacturers like stability and this extreme volatility in commodity prices is a new phenomenon,” Saigol said. “In my opinion, prices of yarn and fabric will bounce back next season.”