Home Industry Trends Despite high cotton prices, hope for home textiles

Despite high cotton prices, hope for home textiles

If last two months’ exports of home textiles to USA is any indication, industry is seeing a revival of demand from world’s largest market. That is perhaps partly aided by depreciating rupee which according to foreign exchange experts has not yet seen its bottom. After a weak start during the current calendar year, India’s exports to the US (in USD terms) of terry towels and cotton sheets have witnessed strong recovery with YoY growth of 10.5% and 6.5% (in the past two months), respectively. Recovery comes on the back of de-growth in exports witnessed during the first few months of the current calendar year. Bed and bath linen together constitute about 67% of the home textile industry. Year to date exports of terry towels from the country during the current calendar year to the US decreased significantly by 11% to USD 435mn (vs. a 5.1% decline in world terry towel exports to the US).  However, decline was partly offset by a 3.2% YoY increase in realisations.  Year to date exports of cotton sheets from India during the current calendar year to the US decreased by 3.9%   to USD 452mn (vs. a 1.7% decline in world cotton sheet exports to the US). Importantly, realisations too decreased by 4.2% during the period.

However, rising cotton prices may act as dampener for the industry. Domestic cotton prices have increased by 14.9% since January 2018 to Rs 130/kg currently. Yarn prices have increased in tandem to Rs 214/kg, implying a yarn-cotton price spread of Rs 84/kg. Cotton inventory held by the home textile players for consumption up to October 2018 has provided partial relief from the increasing cotton price. However, home textile makers hope that cotton prices will cool down with the onset of new season (new cotton season starts from October). Last year cotton production was adversely affected due to the pink bollworm attack in some parts of the country.

India is the largest producer of cotton as well as a net exporter of cotton and cotton yarn. The country has the distinction of having the world’s largest area under cotton cultivation. Its closest competitor in terms of production – China, is a net importer of cotton.

Further, world cotton scenario also indicates lesser production during the year which in turn keep the prices at the elevated level. The US Department of Agriculture (USDA) estimates global cotton production to decline by 1.2% to 26.6mn tons for 2018-19. On the other hand, global cotton consumption during 2018-19 is estimated to increase 3.8% to 27.9mn tons, resulting in global cotton deficit of 1.3mn tons. Cotton inventory in China is also expected to decline further by 21% YoY driven by reserve sales and strong consumption growth. According to USDA estimation, India’s cotton production in 2018-19 is expected to decline by 1%. Thus, all indicators from supply side suggest that cotton prices may not decline even after the commencement of new season and new supply flooding the market.

While Indian and USA cotton prices remained almost at similar levels, China’s cotton prices have historically remained high. Further, China’s draw down from cotton reserves during the last five years was also high resulting in cotton reserves going down. Prevailing stock levels usually have a strong influence on the market price of cotton.

Indian cotton production increased from 34.5 million bales in 2016-17 to 37.7 million bales in 2017-18. In 2017-18, Pakistan opened its doors to import Indian cotton which brought much needed foreign exchange for the country but also increased cotton prices in the domestic market. India’s cotton exports increased from 5.8 million bales in 2016-17 to 6.7 million bales in 2017-18.

Lesser production of cotton globally is likely to push up its prices and attractive global prices may result in even more export of cotton from the country during the year. Also, depreciated rupee vis-a-vis dollar (rupee has depreciated more than 10% during last one year) will make Indian cotton more attractive for global customers. Increased cotton exports may not help the cotton price to cool down in the domestic market.

However, Indian exporters have got a breather when the government announced the extension of Merchandise Exports from India Scheme (MEIS) for made ups beyond June 2018. MEIS was introduced by the Government of India under the Foreign Trade Policy (FTP) 2015-20, effective April 1, 2015. It seeks to promote export of notified goods manufactured/ produced in the country. Under the programme, exporters are given duty exemption scrips that are pegged at a certain percentage of total value of their exports. These scrips can be used to pay duties on inputs including customs. Incentive rates for certain items have been enhanced to 4% of value of exports from 2% with effect from November 1 to June 30, 2018.

Export of made ups from India also gained a 4 per cent MEIS benefit from November 2017 and it was then announced that the scheme would be valid till June 30, 2018, only. However, an announcement made a few months back by the government has brought cheers among the exporters.

This coupled with depreciating rupee and demand recovery signs in US market have given fresh hopes for Indian home textile exporters. Inflated cotton prices are unlikely to affect their competitiveness globally as all the players are affected by the increased prices as it is a global phenomenon. Their main concern originated from demand side for which they are seeing Greenshoots now.

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