Ratings agency ICRA has maintained negative outlook on the cotton spinning sector amid uncertainty over the coronavirus outbreak. It noted that domestic spinning sector’s operating profitability is expected at multi-year lows in FY20, closer to the level last witnessed in FY12, when most players suffered sizeable losses on inventory due to a steep unexpected correction in cotton prices.
According to the report, even though domestic cotton fibre prices continue to be competitive vis-a-vis international cotton prices at present with a price spread of 4 percent (reduced from 9 per cent in Feb-20), a further correction in international cotton prices amid demand-side uncertainties could render domestic spinners uncompetitive in the international markets, similar to the situation which was witnessed in H1 FY20. Besides, it said the domestic spinning industry remains highly dependent upon exports, especially to China where 30 percent of the cotton yarn produced in the country is exported. It noted that China has accounted for nearly one-third of the shipments in recent years.
ICRA has pointed out that the continued uncertainty on the extent and duration of the impact of the coronavirus outbreak in China and the consequent lockout in parts of the country has resulted in a shutdown of production units in India, trickling down to lower demand for the yarn. It added that the resultant correction in realisations, even as cotton prices have remained relatively stable on the back of scaled-up market interventions by the Cotton Corporation of India (CCI), are expected to contract spinners' contribution margins again, compared to the previous three months.
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