India bans cotton exports to shield textile industry

KARACHI——The international cotton prices have resumed their upward march as the world’s second largest cotton producer, India, has decided to ban export of cotton to keep prices stable in the country to provide support to their local textile industry.

The global rise in cotton prices also provides relief to Pakistani textiles industry facing energy issues, said the analysts at InvestCap Research.
They said after rising pressure from the local textile manufacturers, the Indian government decided to place a ban on cotton exports aiming to keep prices stable at home to provide a sort of privilege to the textile products’ manufacturers. India has already exported 9.4mn bales (1 bale = 170kgs) of cotton so far against a surplus of 8.4mn bales while the country still has pending export orders of around 2.6mn bales.

On the other hand, depleting trend in the Indian cotton stocks along with China’s increasing cotton stock (India’s 80 per cent exports are headed to China) to stabilise domestic prices to support local textile manufacturers has already created global supply vacuum yet again. Being the biggest consumer of cotton, China imported 15.4mn bales in FY11, while by Feb-12 the Chinese government is reported to have imported a total of 21.8mn bales vs 56.3mn bales of consumption estimated for FY12.

“However, reversal in cotton prices may be considered a phenomenon as the global cotton demand is estimated to go down by 4 per cent YoY in FY12 while the supply is expected to improve by 6 per cent YoY,” viewed Abdul Azeem of InvestCap.

Furthermore, he said, recent cuts in growth estimates by the two emerging giants, China and India, to multi-year low are expected to keep cotton prices within a reasonable range.

At the local front, cotton prices remained bottomed after the bumper crop was estimated at 14.2mn bales for FY12. As against last year’s sky-high levels of Rs13,000/maund, FY12YTD’s cotton price remains below Rs6,000/maund (at average Rs5,864/maund). Thus, ban by the Indian government on cotton export is expected to result in fueling the local cotton prices in Pakistan (prices of May-12 futures delivery have also reached US 93.23 cents/maund in int’l market).

The local textiles sector, which has already accumulated whole year cotton inventory, would be key beneficiary, as soaring local and int’l cotton price difference would improve local textile companies’ margins (see table for revised earnings forecast). Recent sharp pullback in cotton prices is expected to improve textile sector margins from 4QFY12 onward as the local companies had already accumulated stocks for FY12 at an average Rs5,500/maund. As such, any further rise in international cotton prices would only improve the local textile sector companies’ profitability.