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 the 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 trends across all markets, and a shift in spending towards services.
- US and UK Retail sales contracted in December and the January Consumer Confidence Survey@ 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 reflected 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 a lot of demand destruction is inevitable for cotton going forward.
- Alternate fibers are penetrating rapidly using the opportunities rising due to the high cost of cotton. We are witnessing this change in many weaving clusters in Tamil Nadu. This will also re-balance the demand equation.
- The industry is facing resistance from value chain partners even up to the retail side in domestic markets, due to high prices. The inflationary trend is also hitting consumption and retail is opting for alternate fiber 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 & many of these commodities corrected 15 to 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.
- The expectation of robust cotton plantation across the globe & such initial reports from April will naturally act as a check to speculation, and bring a bearish sentiment to the 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.
