The Hindu Business Line : Global mill use of cotton set to slide

Mumbai, Dec 3 For the first time in recent years, global mill use of cotton is set to show a sharp decline in 2008-09. This is the result of a combination of factors including slowing global economic growth, financial market uncertainties and anticipated lower demand from developed economies for cotton textiles.

Textile Exports

Consumption requirement in developing economies (such as China, for instance) that export cotton textiles to industrialised countries is likely to decelerate.

As a result, world cotton trade may shrink to its lowest levels in recent years.

For 2008-09, the Washington-based International Cotton Advisory Committee (ICAC) has projected a per cent decline in global cotton mill use to 24.9 million tonnes (26.4 mt), while production too is estimated lower by sicx per cent at 24.6 mt (26.2 mt) in the wake of a decline in cotton area especially in the US caused by competition for acreage among a crops such as grains and oilseeds.

Trade forecast

The international body has also projected world cotton trade to decline to a recent low of 7.3 mt, caused primarily by an anticipated 24 per cent lower imports into China to 1.9 mt in addition to other importing countries.

In view of these expectations, the ICAC has forecast 2008-09 season-average Cotlook A-Index at 69 cents a pound, lower than the season-average of about 73 cents a pound for the previous year.

While recession is a matter of fact going by economic data regularly published, there is reason to believe commodity markets may actually be beginning to bottom out.

Further downside risk to commodities, especially agricultural products seems limited from the current levels. Agricultural supplies are in a position to respond to prices rather swiftly.

On the other hand, the factors that create upside risk have not gone away.

Focus on demand

Currently, the market is focussing on the demand side. Although fundamentals are undergoing repeated changes, a strong dollar has capped the upside for most commodities.

If the dollar begins to lose steam - there is expectation it would sometime in the second quarter of 2009 - commodity prices in general including of course cotton would be lifted.

By February 2009, the world cotton trade will begin to look at further reduction in the US cotton acreage.

It is the time when market arrivals in the northern hemisphere would have run their course.

Price range

Importantly, projected ending stocks for 2008-09 are lower than in the previous year.

Going by past trends, a season-average price of 69 cents would mean a wide trading range of between 60 and 80 cents a pound.

Market participants will have to ride out the current storm and wait for conditions to improve.

Indian market continues to face a stand-off. Despite repeated pleas by the user industry and trade, the Government has rejected the idea of reducing the minimum support price for cotton.

Purchases by the official agencies provide a floor and support prices.

It is, however, going to involve a huge amount of subsidy.

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