Cotton yarn export prices are subject to changes in demand, cotton cost and variation in the INR against the US$. The recent strengthening of the Indian Rupee against the US$ has slightly made Indian yarn uncompetitive against those in Pakistan and China. Meanwhile, China has dramatically reduced imports ever since the change in China's cotton policy as weavers are gradually substituting imported yarn with domestic supply made from cheaper cotton. This is reduced shipment of cotton yarn from India into China.

Going back, cotton yarn prices had peaked to an average of INR224 per kg in September 2013 or US$3.51 a kg. Meanwhile, coincidently cotton prices were also ruling at a high of INR135 per kg for Shankar-6 type. But as cotton prices started moderating, yarn prices also started losing at a similar pace. Cotton lost INR17.60 a kg until May while yarn prices gave back INR19 a kg. Yarn prices witnessed YoY increase of 10-18 per cent successively between August 2013 and March 2014. Venturing into a new financial year, this dropped to less than five per cent touching 3.5 per cent in May. In US$ terms, the YoY increases fluctuated between -3.8 per cent and 0.9 per cent during the same period. Meanwhile, cotton prices saw YoY jumps of 17-30 per cent and by 9 per cent in April and May this year. This establishes that there is a correlation between the movements of cotton fibre and cotton yarn prices.

The INR hovered above INR61-62 to a US$ during August to March 2013-14, only to appreciate to sub-INR60 in April and May. The INR had depreciated 12-16 per cent during that period helping unit value realisation to range between US$3.41-3.54 per kg of cotton yarn. Stronger US$ made earning rise in INR terms for Indian exporters, as export prices are fixed on US$ FOB terms. Now, that the INR has appreciated revenue earnings have fallen and buyers are demanding further reduction in prices.

China is the largest buyer of Indian cotton yarn. At a point of time (quarter II of 2013-14), China accounted for close to 50 per cent of Indian exports. The import volume than was around 45-60 million kg. This fell to around 40 per cent in December-January and remained at less than 40 per cent since February. In May 2014, it was just 31 per cent in US$ term and 35 per cent volumes at 29 million kg. This was 25 per cent lower than last year and less than half of July, the peak. The reduction in import by China, has led to supply glut which had to find way to other importing countries and in domestic markets, which asserted pressure on prices.

Going ahead, China is likely to continue buying lesser from India and with INR appreciating, the pressure on cotton yarn markets will increase which may lead to some price equilibrium in coming months.
Courtesy:  YnFx ExportWatch