Cotton has touched a 10-year high and its prices are advancing daily, both in the international as well as the Indian markets. Abundant liquidity combined with robust demand for goods has created a bullish momentum during 2021. But now, all fundamental factors are changing and it’s time to be more alert on purchases and inventories, because fall from the current price will be sharp and quick.
The following factors would influence the correction in prices:
- Fashion goods demand is falling due to inflationary trend across all markets, and a shift in spending towards services.
- US and UK retail sales contracted in December and the January Consumer Confidence Survey of US fell by nearly 6% to its lowest level since November 2011.
- We are getting feedback from international markets about resistance from customers towards accepting new prices and the same signals are reflecting in the new order confirmations from developed markets.
- Cotton is not an essential commodity like edible oils or rice. Its demand purely depends on the spending power of people. With inflation on the rise, the spending power will be put to test and lot of demand destruction is inevitable for cotton going forward.
- Alternate fibres are penetrating rapidly using the opportunities rising due to high cost of cotton. We are witnessing this change in many weaving clusters in Tamil Nadu. This will also rebalance the demand equation.
- Industry is facing resistance from value chain partners even upto the retail side in domestic markets, due to high prices. Inflationary trend is also hitting consumption and retail is opting for alternate fibre products.
- Signals from developed countries on tightening the liquidity and raising interest rates will also reduce the speculative interest in cotton, that too at these historically high prices.
- We witnessed a 10-year high price in most of the commodities in 2021 and many of these commodities corrected 15-20% from their peak levels. This may happen in cotton also.
- Lower demand outlook for fashion goods in exports, shift in fibre base, inflationary trend here in domestic fashion space – all the factors will lead to lower consumption level of cotton.
- Expectation of robust cotton plantation across the globe and such initial reports from April will naturally act as a check to speculation; and bring a bearish sentiment to cotton trade.
“The recent bull run over the past 45 days is mostly speculative in nature and we feel that the current prices are not sustainable. We have alerted our member manufacturing companies to deal with the situation carefully,” said Prabhu Damodharan, Convenor, Indian Texpreneurs Federation.