Continuation of China's direct subsidy-based policy and lower demand from spinning mills will keep domestic cotton prices under pressure in 2016-17, says a report.
India Ratings and Research (Ind-Ra) said it maintains a negative outlook on the cotton sector for the next fiscal.
"We believe that the continuation of Chinese direct subsidy-based policy and lower demand from spinning mills will keep domestic cotton prices under pressure.
"Though Bangladesh, Pakistan and Vietnam have replaced China with India as a supplier, volumes are picking up at a slow pace, and are unlikely to match Chinese demand," India Ratings and Research Senior Analyst Neermoy Shah said.
India produced 28.5 million bales during April-December 2015 as against 29.5 million bales in FY15 and 31 million bales in FY14 against which exports have been 5.3 million bales (4.2 million bales in FY15 and 9.3 million bales in FY 14).
In CY17 (CY refers to International Cotton Year, which commences from August and ends in July), the ratings agency expects cotton prices to stay firm.
Domestic prices had declined in CY16 in line with Ind-Ra's expectations and are expected to remain under pressure in CY17 as well.
Operating margins will stay in 1-2 percent range for ginners and traders, but the profit after tax margins may improve as companies reduce stocks and focus on receivables management.
International cotton prices, however, will remain sensitive to the release of cotton by China from its cotton reserves, which Ind-Ra estimates to be around 59 percent of global cotton stock at FY16.
Chinese cotton reserves will directly impact the quantum of imports in that country and consequently, global stock levels outside China, the report added.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
