Having inked contracts at much higher rates earlier, importers here are staring at a loss.

The continued stand-off between the US and China over trade tariffs has created uncertainty in the Indian cotton market. After international cotton prices slipped by over 16 per cent over the past month, Indian cotton importers are staring at a loss and are looking to rework import contracts.

Even as trade sources revealed that some import contracts, which were made at a high price of about 85 cents, may get cancelled or reworked, the uncertainty over a possible trade truce between the US and China is keeping them jittery.

According to trade estimates, so far about 18 lakh balesof cotton import contracts have been made of which shipments for about 7 lakh bales have already arrived.

“Import contracts for the remaining 11 lakh bales were entered into at a very high rates of about 80-85 cents. The prices have corrected to about 69 cents now. In this scenario importers may also look to either cancel the contracts or rework the deals. There is extreme panic in the market at present due to uncertainty. We don’t know where the market trend will move,” said Atul Ganatra, President, Cotton Association of India.

US cotton futures for July contracts were weak on Tuesday, trading at 65.70 cents per pound. A month ago, the prices quoted as much as 79 cents.

Importers worried

However, compared to international cotton prices, Indian cotton has corrected by only about 5 per cent from ₹46,500 a candy (each of 356 kg) to ₹44,500 a candy.

Companies engaged in importing cotton expressed concerns on a possible loss from the cancellation of the contracts. “Indian traders are afraid to cancel the contracts because they don’t have that hedging mechanism (to protect the price difference). Either they will have to go for arbitration or they will have to pay the difference. Then there is no point in cancellation of import contracts. Unless there is a hedging system to protect the losses, they can’t afford to do it,” said a senior official from a company engaged in import and export of cotton.

The current scenario, according to traders, is in complete contrast to the sentiment following a lower crop outlook by the CAI. Earlier this month, CAI had projected India’s cotton output for the year 2018-19 at 315 lakh bales, about 6 lakh bales lower than its earlier estimate last month. Last year, the total cotton crop stood at 365 lakh bales.

The United States Department of Agriculture (USDA), too, has reduced its Indian cotton crop estimate for the crop year 2018-19 following a weak monsoon last year and crop damage in key growing regions. From its earlier crop estimate of about 345 lakh bales, the USDA has now projected India’s cotton crop at 325 lakh bales.

“The USDA has made this reduction in their latest estimate, released on May 10, after extensive deliberations with the Cotton Association of India and also after considering all aspects and the prevailing situation in India,” Ganatra said.

Courtesy: The Hindu Business Line