If the Chinese government offloads its two-year reserve stock of cotton, mills will get access to cheaper cotton from the market. Hence, with lower cotton prices.

If the June quarter results are to be taken as a benchmark, cotton spinning mills are looking at a tough year ahead. Data from about 105 listed entities shows a 67% drop in average net profit from a year ago.

This is because of weak realizations that cascaded into poor operating performance, as average operating margin was down 240 basis points to 9.9%.
One basis point is one-hundredth of a percentage point.

The slowdown comes after nearly six robust quarters, where net sales and revenues were rising.

The main reason for this sudden turn in fortunes is the weakening global demand for cotton yarn. The latest available data with the Directorate General of Foreign Trade for the month of April shows that yarn exports, at 99.9 million tonnes, were 11% lower than the previous month and nearly 30% lower than in January.

Large business groups are pessimistic and believe that cotton yarn exports in the current year will be 25% lower than the previous year. Yarn prices have suddenly softened on falling volumes.

Obviously, falling international prices and demand have an effect on domestic yarn prices too, which have been sliding in the last few months. In June there was a substantially higher stockpile of cotton yarn in the country when compared with a year back, which in turn will keep prices soft.

But, this sudden mayhem is closely linked to ChinaΆs new cotton policy, which urges consumption of domestic raw cotton and yarn by its textile industry. In other words, China, which is the largest importer of cotton yarn, will cut back imports, hurting Indian exports.

Also, as the Chinese government offloads its two-year reserve stock of cotton, mills will get access to cheaper cotton from the market. Hence, with lower cotton prices, Chinese spinning mills will be able to offer yarn at cheap prices internationally. Both these factors will stymie any rise in global yarn prices.

Further, if yarn prices are subdued and exports fall further, Indian mills, which are operating at peak capacity, may have stocks piling up. This in turn will increase holding cost and therefore impact profitability.