India Ratings & Research (Ind-Ra) has revised the outlook on the cotton sector to 'negative' for FY16 from 'negative to stable'. The agency has also revised the rating outlook to 'negative' for FY16 from 'stable'. This is because the contraction in domestic yarn production for exports, unlikely recovery in cotton exports, and a fall in domestic cotton prices below minimum support prices (MSP) have pushed domestic cotton stocks high. This is likely to keep domestic cotton prices under pressure in FY16.
The conversion of China's cotton reserve policy into a direct subsidy policy in April 2014 will increase reserve cotton sales and reduce China's cotton imports to half in FY16. We expect the global cotton prices to be low in the medium term due to the negative sentiments among market participants about the quantum of reduction in global cotton trade and the subsequent volume overhang. The agency believes while the policy change will increase the yoy cotton mill consumption in China, India's cotton exports will suffer drastically.
Cotton exports from India into China declined 26.4% yoy over April-October 2014 compared to a 4.3% decline the year earlier. Lower global cotton prices and the relatively stable Indian rupee will keep the attractiveness of India cotton under pressure in the export market in MY15-16. India’s cotton exports to other destinations are unlikely to replace the quantum of lower trade with China.
Continued subdued export demand for Indian cotton yarn is likely to keep domestic mill consumption muted in Marketing Year (MY) 15-16. Domestic cotton consumption and cotton yarn production have shown muted growth at 3.6% and 2.3%, respectively, over October-November MY14-15 due to a drastic reduction in off-take from Chinese counterparts. In MY15-16, the agency expects cotton prices to trade lower yoy unless the demand of cotton yarn recovers. Kapas prices (represented by Shanker-6) are likely to trade between Rs 40/kg and Rs 45/kg while lint prices will trade in the range of Rs 85-Rs 100/kg for MY15-16. Ind-Ra expect domestic stock to use ratio for MY15-16 to be near 12% (MY14-15: 12.2%). In FY15, operating profitability of Indian cotton ginners and cotton exporters was under pressure due to volatile cotton prices. Credit profile of domestic ginners and cotton exporters reflected by ginning spreads will continue to remain under pressure in FY16.