With a spurt in cotton prices, the domestic cotton prices is likely to adversely impact the yarn demand and profitability of spinning companies in the second quarter. Domestic rating agency ICRA in a report on the Indian spinning industry has said that the prices of ginned cotton have increased significantly from about Rs 90-92 a kilogram in April 2016 to about Rs 122 kg currently, surpassing international rates, which will hurt yarn demand and profitability of spinning companies in the current quarter
As per ICRA estimates, the profitability of spinning industry will be adversely impacted because of the price rise as it faces challenges of slow growth in domestic consumption and high reliance on exports. With domestic cotton prices higher than international ones, export prospects for the spinning industry also present a challenge.
The report further noted that many spinning companies had expected cotton prices to be stable in 2016, and the cotton inventory stocking was not beyond two months in March 2016. The spinning players, who may have stocked inventories for four to five months in March 2016, may witness improved profitability as they are likely to gain from higher yarn prices.
ICRA further said that slower cotton sowing and decline in cotton sown area, apart from cotton stocking by intermediaries, could have led to this sharp rise in prices. However, the recent increase in cotton prices can motivate the farmers further and the cotton sowing area can improve in the coming months. Stability in cotton prices is most critical for a profitable textile industry as it minimises the risks of inventory losses and the need for a price hike for the existing and future orders.
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