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Cotton spinners facing more challenging business climate in 2014

Cotton spinners facing more challenging business climate in 2014 Source:
Date: 11-02-2014
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The challenges facing many spinners appear to be mounting during the early part of 2014, following a period since 2011 when trading has been brisk, with increased Chinese imports driving demand and helping sustain a healthy margin of profit. Raw material replacement costs have also remained relatively stable during that timeframe, particularly when compared with the turmoil witnessed in 2010 and 2011.
The favourable business climate would seem to have spurred renewed investment in production capacity outside of China, with reports Cotton Pricesforthcoming from Pakistan, India, Turkey, Bangladesh, Vietnam and Indonesia of fairly sizeable additions to spindleage.
However, in recent months, anecdotal evidence from a wide range of yarn producing countries has pointed to a less active demand from China. Statistics appear to confirm slower growth in yarn exports from India and Pakistan. In addition, spinners have faced increased volatility in raw material replacement costs, with cotton prices fluctuating more widely. So far this season (the international cotton season runs from August through to July), international cotton prices, as measured by the Cotlook A Index, have fluctuated within a range of 15.45 US cents. During the previous 6 months, the Cotlook A Index remained with a 10.00-cent range. Moreover, the recent direction in raw material replacement costs has been upward, with yarn prices, in a more difficult trading climate, struggling to keep up. As a result, profit margins, on paper at least, would seem to have contracted.
An unwelcome further complication for some spinners in many markets has been increased volatility in exchange rates (see accompany chart), witnessed from the middle of last year onwards, relating primarily to the build up to, and announcement of, the US Federal Exchange RatesReserve’s tapering of its quantitative easing programme. The incremental withdrawal of support for the US economy by the Federal Reserve is widely seen as negative for emerging markets. While weaker currencies may have been helpful for some businesses able to source raw materials in the local market and sell finished goods for export, it is the wider fluctuations in rates that have rendered forward pricing and risk management very challenging.  The increase in interest rates in Turkey last week as the government sought to stem the flow of money out of the country may be considered unwelcome and may counter to some extent any beneficial impact on export competitiveness of the lira’s depreciation.
The yarn business and price outlook for the next six months would seem opaque at best. Macro-economic factors will doubtless colour sentiment and should remain influential, but whether the current downturn in confidence around the globe will have a lasting impact is perhaps questionable - the yarn market has fared well during the past couple of years when the global economy has scarcely been buoyant. More decisive, arguably, will be the direction of cotton prices and whether Chinese yarn import demand recovers to its former vigour in February/March, as many spinners in Asia expect.
We believe that cotton prices may be at the top end of their trading range for the next couple of months, with some modest downward potential. As for Chinese demand, currency depreciation in supplying markets could provide a stimulus to import offtake and buying may well improve from the levels witnessed towards the end of last year. However, we do not foresee that China’s cotton yarn demand will continue to grow at the pace witnessed during 2013.
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