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Indian policy flip-flop on cotton adds to sector woes: Fitch

India Infoline News Service/ 17:54 , Mar 14, 2012

This uncertainty on cotton price movements could over the long term increase raw material price risk and inventory carrying risk for textile companies, which have been struggling to manage liquidity and working capital in a difficult operating environment.

Fitch Ratings says that the recent partial lifting of ban on cotton exports by the Indian government has created uncertainty over cotton prices and timing of cotton buying for domestic textile companies.


"The ban may provide temporary relief to domestic textile companies in the form of lower raw material prices, but the government's policy flip-flop will give rise to uncertainty over the direction of cotton prices over the long-term," says Tanu Sharma, Associate Director in Fitch's Corporates team.


This uncertainty on cotton price movements could over the long term increase raw material price risk and inventory carrying risk for textile companies, which have been struggling to manage liquidity and working capital in a difficult operating environment.


The ban was initially imposed on 5 March 2012 to curb speculation and ensure domestic availability of cotton following a sudden surge in cotton exports to China in February 2012-March 2012. The government then partly reversed its decision by allowing shipments of quantities that have already been registered and suspending fresh cotton exports indefinitely. However, the offtake is slow in both domestic and export markets and cotton production is in surplus. Consequently, even before the ban was imposed, domestic cotton prices were hovering around the minimum support price levels (Rs. 33-34 per kg).


Uncertain regulatory policy in the past has had conflicting impact on different parts of the textile value chain in India. If the ban remains in force, domestic cotton prices will fall leading to a one-off benefit in the form of lower raw material prices for domestic textile companies, including cotton yarn manufacturers, fabric makers and apparel companies. However, cotton traders and ginners could suffer losses on existing stocks, if they have procured more than the orders received. Inventory losses for yarn manufacturers might not be as pronounced as those seen in 2011, given that many companies have refrained from building up large stocks. As a longer lasting impact of the imposition of the ban cotton acreage may fall next year as farmers will be discouraged to grow cotton and opt for other cash crops instead.


In the year to date, 9.5 million bales (1 bale = 170kg) have been exported, with another 3.5 million bales registered for export, against 5.1 million bales exported in FY11.


Also read:


Traffic under-performance key risk for Indian toll roads: Fitch



 



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