Cotton prices are to "remain firm" through 2010-11, supported by the fibre's supply squeeze, Fitch Ratings has forecast, as it warned that the rally threatens Indian yarn mills with closure.
Cotton prices will stay "well above those" of the 2009-10 crop year, which ended in September, "due to the huge international demand-supply gap" which has emerged as economic recovery boosts demand following depleted harvests in many countries.
Prospects for India's crop, the world's second biggest after China's, had been eroded by "untimely rains in major cotton producing states", Fitch said.
The Confederation of Indian Textiles Industry said last week that Indian output may come in at about 5.1m tonnes, roughly 425,000 tonnes below the estimate by the country's official Cotton Advisory Board.
Export conundrum
Cotton prices eased in New York on Monday, slipping 1.4% to 142.53 cents a pound for March delivery.
However, this follows a rebound of some 30% from a late-November low, as fears have waned of heavy measures to quell the economy in China, which also the top consumer and importer of the fibre.
Meanwhile stocks in the US, the leading cotton exporter, are on course to end 2010-11 at 1.9m bales, their lowest for at least 50 years, the US Department of Agriculture said last week, an estimate which assumes a rapid slowdown in the current firm pace of shipments.
"Export sales are currently running at 87.5% of the USDA's projection for the entire marketing year, far above the average pace of 51.8% seen at this point," Terry Roggensack at US analysis group Hightower Report said.
"The USDA is apparently assuming that the cotton market will continue to rally and that this will bring a sharp drop in the pace of export sales in coming months."
'Spinners will suffer'
Prices have soared in India too, up 60-70% in the first 11 months of the year, despite measures such as export curbs aimed at protecting domestic buyers.
"The capping has not helped the domestic textile sector much in the backdrop of soaring international cotton prices, which has encouraged speculation by traders and creation of artificial scarcity in the domestic market," Fitch said.
Meanwhile a limit of 720,000 tonnes on yarn exports, to be shipped by mid-January, to protect textile mills, looks set to worsen pressure on spinners attempting pass on cotton price hikes.
"Yarn spinners will suffer as their selling prices are likely to fall," the ratings agency said.
"Smaller cotton spinning mills face the threat of shutting down if they are unable to buy and stock cotton in the ongoing cotton-buying period of October 2010-February 2011."
Ratings implications
Fitch cited Mountain Spinning Mills and Tuticorin Spinning Mills as companies at a "higher risk" of liquidity pressures which could warrant a review of credit ratings.
"Sharmanji Yarns is partly insulated from such volatility by its presence in polyester blended yarn."
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