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High cotton prices sour demand rebound for Indian mills

 
 

By Aniruddha Basu and Nandita Bose

REUTERS

MUMBAI, 9 December 2009

* Cotton prices up 20 pct in six weeks

* Rising input costs to bite into profits

* Domestic players can raise prices, exporters constrained

MUMBAI, Dec 9 - An unforeseen drop in global cotton output has seen prices flare, putting at risk the fragile recovery of India's textile industry that was battered by the global recession earlier in the year.

The rising demand the industry was hoping to cash on, bolstered by 25.5 billion rupees in government subsidies to upgrade technology, has started to look less promising as a sharp spike in input prices threaten margins in the coming quarters.

"Our textile exports have increased and so has our domestic consumption, and just when recovery was in sight cotton prices have started shooting up," said D.K. Nair, secretary general of trade body Confederation of Indian Textile Industry.

"Companies will continue to lose margins. Just when margins were recovering, the prices rose. The industry will then have to reduce production as that is the only way out," said R.K. Dalmia, senior president at Century Textiles & Industries .

Cotton prices have shot up over 20 percent in the last six weeks. The benchmark Shanker-6 variety is at 26,500 rupees per candy of 170 kg from 23,500 rupees in October, data showed.

The global shortfall means the crop in India, despite being on expected lines, is being exported at a higher price, crimping supply at home.

About 6 million bales of cotton have already arrived in the first two months of the cotton marketing year and 4 million bales have been booked by exporters, Century Textiles' Dalmia said.

PRICING DIVIDE

A cornered industry has few options. Raising prices would seem one, but analysts say that too is geography specific.

"Price increases are easier to implement domestically rather than internationally," said Devangshu Dutta, chief executive, Third Eyesight, a textile consultancy.

"If we look at exporters, they are driven by a more dynamic mix and trade across currencies, and in the current scenario the flexibility for price rise is not that high," he added.

Alok Industries with over 60 percent of sales in India, has raised prices, but Gokaldas Exports , which gets nearly all its revenues from exports, will not.

Customers the world over are able to source cotton products at competitive prices from Asian countries, making it difficult for Indian exporters to raise prices of finished products, said Rajendra Hinduja, managing director of the Bangalore-based Gokaldas.

"Domestic players will pass on whatever can be passed on...so there may be some possibility of recovering costs. But in exports you can't even do that as there is a lot of choice for the importing countries," CITI's Nair added.

 
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