effect of fall in cotton prices on textile industry

Fall in Cotton Prices: Causes, Global Demand and Forecasts for Cotton Prices

The textile industry is one of the largest industries in the world, and cotton is the most important commodity in the textile industry. It's one of the largest industries in the world, employing millions and underpinning economies across the globe. Cotton is the kingpin of this realm, the most important commodity, the lifeblood that courses through its veins.

However, cotton prices are presenting a very volatile picture. The volatility in cotton and cotton yarn prices, which were already high, was further intensified by the COVID-19 pandemic. The pandemic disrupted the global supply chain, leading to a shortage of raw materials and increased prices.

Cotton prices surged to a 10-year high in October 2021, reaching $1.16 per pound and touching levels not seen since July 7, 2011. The COVID-19 pandemic has had a significant impact on cotton prices, leading to a decrease in production, a decrease in demand, shipping disruptions, and an increase in operational expenses, ultimately increasing cotton prices.

Shipping delays brought down cotton futures prices by 30% between February and early 2020.

What is causing the decrease in cotton prices?

Cotton mill use depends largely on two major factors: global textile demand and competition from synthetic fibres. Over the past decades, global demand for cotton has been affected by competition from synthetic fibres, which has led to a decrease in demand for cotton, especially in a growing economy like India, where a majority of the young population is opting for leisure. Other industrial and economic developments have fueled this change.

Synthetic fibres have become increasingly popular due to their technical properties and relatively low price, making them a central part of our wardrobes. The production of synthetic fibres does not require agricultural resources or the use of toxic pesticides or fertilizers, unlike cotton.

Polyester has surpassed cotton as the fibre most commonly used in textiles since the late 1990s. The increasing demand for textiles due to population growth and the increased application of synthetic fibres to industrial use have contributed to the increased demand for synthetic fibres.

Another reason is irregular weather conditions that affect cotton crops every year. Weather conditions, mainly droughts, have taken a hit on cotton production around the world. The entire harvest was reduced in India because the monsoons did not meet historical levels. Also, cotton cultivation severely degrades soil quality, and the use of agrochemicals and the consumption of water have had severe impacts on major ecosystems like the Indus Delta. This has led to a shift towards more sustainable and eco-friendly materials.

The weak demand for cotton is a global phenomenon, and India is also experiencing a decline in demand for cotton.

What is the effect of the decrease in global demand for cotton?

The close connection between domestic and international cotton prices, largely due to the easy and open export of cotton, results in a significant challenge. Cotton constitutes a substantial 65-70% of yarn production costs, causing even a modest 35% increase in cotton prices to trigger a substantial 20% hike in yarn prices.

However, it's worth noting that while cotton prices have remained stable for the past 15 days, the correlation between cotton and yarn prices isn't as consistent.

There was no parity in cotton yarn prices when cotton prices were falling. As a consequence, the decrease in cotton exports has created a ripple effect. The reduced global demand for cotton has led to a significant drop in cotton prices, negatively affecting the profitability of textile companies. This issue is compounded by the lack of parity in yarn prices, which further impacts the profitability of these companies.

Forecasts for Cotton Prices

According to an April 2023 report, cotton prices initially stood at ₹62,500-63,000 per candy and were projected to rise to ₹70,000-75,000 per candy in anticipation of the upcoming festive season in June-July. However, contrary to expectations, the trajectory took a downturn, and the highest price observed during that period barely reached ₹59,000 per candy.

In light of a recent report, cotton prices may exhibit short-term stability. Still, the long-term forecast appears grim due to a global decrease in cotton exports this year, stemming from weakened worldwide demand. Spinning mills, recognizing this challenging environment, are resisting price reductions while offering bulk purchase discounts. Market analysts are, in turn, forecasting a bearish market in the upcoming weeks, exacerbated by the ongoing decline in cotton prices, notably in regions like Gujarat. Unfortunately, the industry is grappling with negative global signals and no immediate indications of improvement, compounding the complexities faced by the cotton sector.

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