Indian Cotton Export Gains from US-China Trade War

The ongoing trade war between the US and China has come to a blessing in disguise for India’s cotton trading---at least in the short term. Subsequent to the breaking out of the trade war between the two countries, India has so far exported 1.5 lakh bales of cotton to China. Going by Cotton Association of India statistics, India contracted between 1.5 lakh bales to 2 lakh bales of exports to China over the last 10-15 days. That’s not without a reason. China is heavily dependent on cotton imports from the US. And following the trade war, China has reportedly imposed tariffs on the import of cotton from the US. Cotton is one of the 106 US goods on which China has imposed tariffs of up to 25 percent. China, the largest consumer of cotton, is the second-largest buyer of American cotton with one out of every five bales headed there.

It was clearly understandable that with tariffs on the import of cotton from the US, Chinese manufacturers who need the raw material in large quantities would all but shift increasingly to India. And why not? After all, cotton prices in India are 10 cents cheaper (at 80 cents per pound) compared to the global prices. The other factor working in India’s favor was that India enjoys low freight charges.

Cotton Association of India (CAI) in its latest estimates, has raised its estimate for India's export for cotton to 65 lakh tonne in 2017-18 (Oct-Sep) from 55 lakh tonne projected in the start of the season. Last year, the country exported about 58.2 lakh bales of cotton. For CY2017/18 (Oct-Sep) consumption is forecast at 324 lakh bales, up by 5.5 percent from last year’s consumption of 307 lakh bales.

And the impact of these positive developments and factors was immediately felt in the market in India. Since the beginning of April, MCX cotton futures have been trading on a positive note and has jumped almost 2.2 percent or Rs. 440 per bale on reports of lower acreage, increase in export demand from China and increase in mill consumption. Prices have been supportive with cotton production for the country having been revised downwards by Cotton Association of India (CAI) for the fourth consecutive month, to 360 lakh bale from 375 lakh bale estimated in December last year, said Ritesh Kumar Sahu, fundamental analyst–agri commodities, Angel Commodities Broking.

Interestingly, CAI has brought down cotton output estimate in March to 360 lb against 362 lb estimated in February. Last year the output was 338 lb. Mill consumption is expected to drop to 324 lb (330 lb), while exports may increase to 65 lb (60 lb). With overall supply expected to touch 410 lb, the closing stock by the season's end is expected to be higher at 27 lb (22 lb). Side by side, one has to keep in mind that cotton consumption is expected to improve over last year due to various government schemes and incentives to boost garment and apparel exports, renewing mill activity.

Sahu of Angel Commodities said that they expect cotton to trade on positive note towards Rs. 21,500 per bale (CMP:  20,620) in next one month on the expectation of improved exports demand and reports of reduction in cotton acreage in coming Kharif season. However, if India’s exports during the recent month surge, thanks to the trade war between the US and China, cotton acreage may increase, supported by near-normal monsoon forecast by private weather forecasting company- Skymet. During the current season, China is the fourth largest market for Indian cotton after Bangladesh, Vietnam, and Pakistan. India hopes to export three times more cotton ie. nearly 27-30 lakh bales to China next year as it looks to restock cotton and also going to impose a 25 percent import tax on US cotton. Moreover, cotton prices may also increase if government declare Minimum Support price (MSP) 1.5 times the cost of cultivation.