Business

Cotton Market Insights: Limited Demand, Lower Price - Big Challenge For CCI To Reduce Its Stock

Indian physical cotton market resumed with few trading activities including ginning - pressing and spinning. All India daily cotton arrivals are improving day by day, but farmers are carrying enough stock due to good production this year. Farmers can carry good amount of seed cotton forward for the next season due to lower price at present. Despite CCI's buying at MSP, farmers are selling average quality of cotton at market price to private ginners as well. Private ginners are able to sell ginned cotton at market price with decent margins. Current Indian cotton fibre prices for S-6/29mm/running quality are Rs 32000-32500 per candy which has bounced back from Rs 31200-31,300 per candy 7-10 days back and is now trading in narrow range. Spinning mills are carrying limited stocks. Major stock is with CCI. During lockdown mills were completely closed for around 45 days, and even now, all mills are not operating with full capacity, so it's expected to reduce annual consumption by at least 45 days (appx 45 lakh bales) as of now. Total all India arrival is around 30 million bales, CCI is carrying huge stock of approximately 10 million bales, imports 1.1 million landed and exports are estimated at around 3.4 million bales as of now. With supplies rising more than use, global 2020/21 ending stocks are at a record high of 184.2 million tons with China and India respectively holding 64% and 21%. Yarn movement is very limited and labour availability is another issue due to which spinning mills are not able to plan for the comingmonths. From 18th May onward, it is expected that the government will ease the lockdown with certain restrictions, in a bid to heal a heavily dented economy. In view of the same, the government has allowed a few special trains and also allowed various kinds of businesses to operate within the norms. ICE is also trading range bound with technical resistance of 58.50 USC for its July 2020 contract with its major support of USC 52. Fundamentally, there are few chances for prices to move up, as demand is still to pick up. Recently there was some news about cotton stock building in China, which gave good support to prices. But due to no concrete news and plan, the market can settle back. If China will come up with some idea and buy cotton then only prices can have support. Otherwise worldwide this year consumption will be lower, with little hope of coming back to normalcy soon. US cotton export sales for week ending 5/7/2020 Net sales of 238,100 RB for 2019/2020 were down 36% from the previous week, but up 50% from the prior 4-week average. Increases primarily for China (198,000 RB), Vietnam (19,200 RB), Pakistan (6,200 RB, including decreases of 2,500 RB), Taiwan (5,500 RB, including 1,800 RB switched from Vietnam), and Turkey (5,400 RB). For 2020/2021, net sales of 93,300 RB were for China (68,200 RB), Vietnam (23,800 RB), and Thailand (1,300 RB). Exports of 241,700 RB were down 35% from the previous week and 20% from the prior 4-week average. Exports were primarily to Vietnam (76,800 RB), China (39,200 RB), Turkey (38,400 RB), Pakistan (25,400 RB), and Bangladesh (18,800 RB). Cotton Corporation of India - Under pressure to reduce its stock CCI seems active now to sell its cotton sourced at MSP. It's a big challenge for CCI to reduce stock and sell cotton in domestic or International market as demand is very dull. Recently, CCI announced good discounts on its cotton stocks, but this was still nowhere near the market price, so no major business is happening. They are offering bigger discounts on bulk buying. This season, CCI may have to pay high cost for not selling cotton while prices and demand both were good. It seems that the organisationis under pressure to reduce its stock as itkeeps revising sales terms and prices to make its cotton more attractive. CCI has not succeeded in doing so yet, as current market prices are too low, as is the demand from spinning mills. Mills and traders should be watchful of CCI offers so as not to miss any good opportunity to buy cotton at a good price. It is expected CCI can further reduce prices and ease up terms and conditions if open market prices remain under pressure. Revised terms and conditions are as below:

Interest rate: The rate of interest on deliveries under clean credit, L/C and against Bank Guarantee has been reduced from present 13% per annum to 9% per annum + GST as applicable, on monthly rest basis.
Carrying charges: The rate of carrying charges has been reduced from present 1.25% to 1.10% per month for first 30 days and thereafter from 1.45 % to 1.25% per month per 30 days + GST as applicable till the delivery of cotton. The amount of carrying charges shall be calculated on monthly rest basis.
Late lifting charges: Late lifting charges have been reduced from present @ 0.75% per month per 30 days to 0.60% per month per 30 days + GST as applicable
Cash discount under L/C and BG: In case of deliveries under L/C & BG the cash discount has been increased from present 3% to @ 4% p.a. on pro-rata basis for unavailed free period from the date of realization of payment.

The buyer shall be entitled for cash discount on pro-rata basis for unavailed free period i.e. for the number of days for which payment is realised earlier than required as per the terms of contract provided buyer makes payment within 15 days from the date of contract. If payment made after 15th day from the date of contract i.e. 16th day onwards no cash discount is applicable

Relaxation in penal rate of interest: Penal rate of interest on overdue UB, L/C and Bank Guarantee has been reduced from present 15% per annum to 10% per annum+ GST as applicable on monthly rest basis.
Revision in free period: Free period has been revised as under:
Up to 9999 bales 30 days
10000 bales and above 45 days The above terms will be applicable from 13th May, 2020 till 30th September, 2020.

WASDE (World Agricultural Supply and Demand Estimates) - May 2020 World ending stocks in 2020/21 are projected to rise for a second consecutive year, but at a much slower pace. With harvested area down globally, production is expected to decline 3.7 million bales, while consumption is expected to rise 11.5 million bales as the global economy begins recovering. Global ending stocks are expected to rise 2.3 million bales, but fall as a share of consumption, from 93 percent in 2019/20 to 85 percent. For 2019/20, the world consumption forecast is reduced to 105.0 million bales, down 5.6 million from the previous forecast and 12.7 percent below the previous year. This would be the largest annual decline in world consumption since the 19th century. World production is raised 1 million bales from the previous month, and 2019/20 ending stocks are 5.9 million higher. The revised year-to-year increase in global ending stocks is 16.9 million bales. India's fight against Coronavirus - Atmnirbhar Bharat Indian government recently declared a huge financial package of Rs 20 lakh crore (10% of GDP) to support economy. This package will focus mainly on MSME and new entrepreneurial set-ups. PM Narendra Modi declared this package in the name of "Atmnirbhar Bharat" Abhiyan, indirectly indicating that India should not be dependent on other countries for what we can produce efficiently within India. Recently we all have seen that during this toughest time our local companies have done tremendous job to manufacture masks, PPE kits and many more necessary things for which we were majorly dependent on imports. Monsoons According to India Meteorological Department (IMD), a low pressure area has formed over Southeast Bay of Bengal and adjoining Andaman Sea. "The monsoon was expected to reach Andaman by May 22. However, the depression over Bay of Bengal can advance the monsoon surge, which is now expected to land at Andaman by May 15 or 16. Normally the monsoon hits Kerala coast 10 days after reaching Andaman. So we can expect the onset of monsoon by May 26 in Kerala," "The IMD had forecast that monsoon may hit Kerala coast by June 1. However, the intensification of the low pressure area over Bay of Bengal can help advance the monsoon surge. A depression over Bay of Bengal ahead of the onset of monsoon is always favourable for Kerala. If the depression is over Arabian Sea, it will adversely affect the arrival of monsoon." (Vimal Verma is a Cotton Trader)