COIMBATORE: Continuation of direct subsidy based policy by China and lower demand from spinning mills in the country will keep domestic cotton prices under pressure, India Ratings and Research has said.

Though Bangladesh, Pakistan and Vietnam have replaced China with India as a supplier, volumes are picking up at a slow pace, and are unlikely to match Chinese demand, it said.

Cotton prices had declined in cotton year (CY) 2016 (CY refers to International Cotton Year, which commences from August and ends in July) in line with the agency's expectations and are expected to remain under pressure in CY17 as well.

"The operating margins will stay in the 1%-2% range for ginners and traders, but the profit after tax margins may improve as sector companies reduce stocks and focus on receivables management," India Ratings, which has maintained a negative outlook on the sector, stated.

International cotton prices, however, will remain sensitive to the release of cotton by China from its cotton reserves, which the agency estimates to be around 59% of global cotton stock at the end of 2015-16. Chinese cotton reserves will directly impact the quantum of imports in that country and consequently the global stock levels outside China.

The cotton industry is likely to revive moderately in CY17 as exports to Vietnam, Pakistan, and Bangladesh would grow, India Ratings said. "Vietnam is likely to increase its spindles capacity by 30% in 2016-17. The local cotton production in Pakistan and Bangladesh is unable to keep pace with the increasing demand for apparels from these locations, providing opportunities to Indian exporters," it said.

However, in view of China reducing imports significantly and the moderating demand from the Indian spinning mills, India Ratings believes that the demand for cotton will increase at a marginal rate in CY17 and the prices are unlikely to increase materially from the current levels.