The Coronavirus (COVID-19) outbreak in China has affected India’s cotton yarn exports, exerting pressure on yarn realizations. China accounts for nearly one-third of Indian yarn exports. The performance of cotton spinning industry, has already been severely constrained in the current fiscal year amid multiple headwinds, including demand slowdown in the domestic as well as export markets and unfavorable raw material prices. While the industry was pinning hopes on a gradual recovery in yarn exports from the fourth quarter onwards, aided by the softening of domestic cotton prices, recent developments could prolong tough times for Indian spinners.

The movement in domestic prices contrasts with international trend where uncertainties on demand have resulted in a sharper correction to cotton fiber prices in recent weeks. Even though domestic cotton fiber prices continue to be competitive vis-a-vis international cotton prices, a further correction in international prices could leave domestic spinners uncompetitive in international markets.

The impact on contribution margins over the next few months could be lower for companies that have built up adequate cotton reserves at low prices in recent months, have a wider geographical presence in markets other than China, and a focus on non-commodity and value-added products.