The global cotton production in the ongoing harvesting season is expected to exceed what the whole world consumes. This is the fourth year in a row that the global cotton output is probably going to outpace the total consumption requirement, raising fears of inventory build up and signalling imminent price correction, sooner or later.
Even the import demand from China, the world's largest cotton producer, is likely to decline by 9.3 million bales due to high inventory levels. China is currently holding 58% of global stock presently that is expected to reach 62% by the next cotton season. Unlike the past two seasons, when China supported the cotton prices with significant buying this time China, has reportedly indicated that the country’s cotton policy will be revised. Though the details have not been released regarding change in policy as of now, any announcement with regard to revision in policy could affect global cotton prices.
Rising Inventory
According to the USDA, global cotton inventories are expected to rise further in 2013-14, as the global cotton production continues to exceed demand and China’s cotton policies continue to support domestic prices above the global prices. The global cotton inventories are expected at a record 93.8 million bales in 2013-14 (up 9% than 2012-13 levels) while the global cotton stocks, ex-China, are expected to be at 35.5 million bales as against 36 million bales in 2012-13. There is a continuous inventory growth in China’s national reserve, which is unavailable to the rest of the world.
Trade To Decline
In view of the anticipated reduction in China’s import demand from an estimated 20.3 million bales in 2012-13 to 11 million bales in 2013-14, USDA expects the global cotton trade to decline by 18% to 38.4 million bales in 2013-14.
Stable mill demand and rising inventories in China are expected to reduce their import needs. However, higher demand from other countries (Pakistan, Mexico, Turkey and Thailand) will partially offset China’s import decline. In 2013-14, reduced import demand is expected to keep shipments lower for most exporters. In addition to the decline seen for the US with exports estimated at 10.6 million bales (down 2.5 million), significant declines are expected for India, Australia and Brazil, where exports are estimated at 6.3 million bales (down 1.3 million), 4.3 million bales (down 1.7 million) and 2.6 million bales (down 1.7 million), respectively.

Fall In Production
The USDA estimates that the global cotton output in 2013-14 is expected to decline 4% to 116.4 million bales (218kg/bale) as against 121.1 million bales, mainly on lower production from China and the US. The global cotton output is expected to decline continuously for the second season from a record of 125.1 million bales in 2011-12. The US is projected to account for most of this decline with 4.2 million bales vis-à-vis world production decline of 4.7 million bales.
China is the largest cotton producing country where production is expected to decline by 6% to 33 million bales due to lower area sown (4% decline) and unfavourable weather (2% decline). Production estimates from India and Brazil are expected to offset the decrease in China, with the production rising by over 1 million bales each on increased area sown. Pakistan’s production is expected to grow by 0.4 million bales (4%) to 9.7 million bales in 2013/14. However, marginal decline in crop is expected in Australia.
Consumption Boost
The USDA expects the global cotton consumption to grow 2% to 109.9 million bales in 2013-14. Consumption in China however is expected to remain unchanged at 36 million bales, as against 50 million bales consumed in 2009-10. China’s cotton spinners have lost market share over the last several years as a result of the government’s MSP that maintained domestic prices above the global prices.
Replacing some domestic spinning, China significantly imported cotton yarn during the same period, with an estimated 8 million bale-equivalents in 2012-13, twice that of 2010-11. India and Pakistan are the key beneficiaries of China’s yarn imports, where consumption by the cotton mill increased continuously over a couple of years in line with China’s MSPs for cotton. In India, the cotton consumption is expected to grow 4% (750,000 bales) to record 23.3 million bales over 2012-13, while Pakistan’s cotton consumption is expected to grow by 6% to 11.7 million bales.

Advantage India
With the Chinese MSP for cotton at 142 cents/lbs, mill demand for cotton reduced significantly as the global prices hovered in the range of 80-90 cents/lbs. However, the Chinese millers aren’t in favour of importing cotton as it attracts complex duty structure under quota imports. Quota free cotton imports attract 40% duty; making imports unviable while yarn imports aren’t under quota system. Therefore, there has been a huge demand of Indian yarn from China.
Pakistan and India have been the largest suppliers of Chinese yarn imports, providing 40% & 20%, respectively, which could lead to price increase in India for domestic cotton in case there is a supply constraint. Moreover, as India is expecting bumper cotton crop owing to good monsoons, the Indian spinners are believed to be at advantageous position. Analysts expect domestic cotton availability during the coming season in the range of Rs 100 per kg – similar to prices in current peak-season – on higher expected inventory of 8.8 mn bales compared to 8.3mn bales in the current season where stock-use ratio is expected to improve by 180bps to 29.8%.
With rising global cotton inventories and expectation of bumper domestic cotton crop amid depreciating rupee to all time high levels, Indian textile industry is expecting to reap benefits on all fronts with competitive positioning in yarn, fabric as well as apparel exports. Market experts are bullish on quality stocks like Vardhman Textiles, Arvind, Page Industries & Kewal Kiran Clothing.