Delayed monsoon, low acreage may push cotton prices further up, warns Fitch

MUMBAI: The rising trend in cotton prices is expected to continue in the September 2012-March 2013 cotton season, as a result of fall in acreage and delayed monsoon, rating agency Fitch said in its 2012 mid-year outlook on Indian textiles.

Fitch said the cotton prices are already on a rising trend, reversing the moderate decline during January-May 2012, and the trend would continue. Prices of power and fuel are edging higher and interest costs continue to be high, although exporters enjoy a breather of a 2 percent interest subsidy, it added.

The rating agency has revised cotton outlook from negative to stable. The Indian textiles are grappling with weak demand and thin margins, Fitch said.

It also expects a prolonged demand slowdown to subdue capacity utilisation levels and revenue growth prospects.

Benefits from rupee depreciation on exports will be limited by existing hedge positions, or by price renegotiations and demand for discounts from overseas buyers, it said.

Fitch has also revised synthetics outlook to negative. Crude-oil based raw material prices have increased on account of rupee depreciation. Lower cotton prices and sluggish demand have reduced the substitution demand for synthetic fibres/textiles. Oversupply in domestic POY (partially oriented yarn) should lead to pressure on selling prices and the margins of synthetic textile companies, it said.

A stable outlook on cotton and synthetic textiles would require a stable policy environment, improved demand/supply position, stabilisation of input costs, and consequent improvement in margins and liquidity. It is unlikely that the sector's outlook will turn positive in the light of the challenging operating environment, it said.