Cotton export ban episode created uncertainty, says ICAC

Committee fears more textile mills, importing nations may switch to polyester

India’s recent flipflop over a ban on cotton exports has created uncertainty in the market, according to countries that produce, trade and consume the item. The twin development could, in the long term, encourage more textile mills around the world, especially in importing countries, to switch to polyester where supplies are more stable, says the International Cotton Advisory Committee (ICAC), an association of nations involved in growing, transacting and buying the soft and fluffy staple fibre.

ICAC executive director Terry Townsend, noting that the world’s cotton trade is estimated at about eight million tonnes, said the recent ban on Indian exports of the commodity, followed by its lifting of the ban yesterday in a week’s time, will not change the quantity of total world trade. “Instead, the episode created uncertainty,” he told Business Standard in an email interview. “The long-term impact will be to encourage more textile mills around the world and especially in importing countries, to switch to polyester because supplies are more stable.”

Now that the ban is lifted, Townsend said the world cotton market would settle back to the prices suggested by fundamentals. In round numbers, the world’s production of the crop is estimated at 27 million tonnes, while the consumption is just 23 million tonnes, he revealed. “Therefore, stocks are rising and the average price level is lower this year than it was last year.”

According to Townsend, the partial lifting of the export ban eliminates the most disruptive aspect of the original ban: the retroactive application of the ban to shipments for which registration certificates had already been issued. The easing of this aspect of the ban will allow contract fulfilment to occur, thus avoiding defaults. “However, the interruption of trade through government regulation is still highly disruptive and serves to undermine the long-term competitiveness of the world cotton industry,” he noted. “Cotton prices are already returning to normal levels because contracts will be fulfilled, with perhaps just a lag of several weeks.”

Townsend said the world cotton market had sufficient stocks during the current season, and prices were lower now than they were at the time of the previous ban on exports. “The Cotlook A Index of average world cotton prices is falling from an average of $1.64 per pound of cotton last season to about $1 per pound this season. ( prices are for delivery to mills in east Asia). Nevertheless, the recent export ban created uncertainty in the market, and it was very expensive for traders and textile mills with contracts for Indian cotton,” he observed. Also, competing cotton exporters would benefit from the ban, even though it was lifted after just one week, because buyers would be careful about buying Indian cotton in the future, he added.

According to the ICAC, the world cotton production for 2011-12 was estimated at 27.2 million tonnes, trade at eight million tonnes and consumption at 23.4 million tonnes, ending stock of 13.1 million tonnes. During 2012-13, the cotton production is estimated at 25.8 million tonnes, trade at 8.3 million tonnes and consumption at 24.3 million tonnes, ending stocks of 14.6 million tonnes.

As for India, the ICAC has projected cotton production at 5.9 million tonnes in 2011-12, consumption at 4.4 million tonnes and exports at 1.5 to 1.7 million tonnes. During 2012-13, India is expected to produce 5.7 million tonnes, while cotton consumption is estimated at 4.7 million tonnes and exports at 1 million tonnes.