India waives import duty on cotton, available import origins may be limited

ICE cotton futures market went up sharply on Apr 13 after India announced to waive import duty on cotton till Sep 30, 2022. The reasons behind may be more attributed to its supply structural problem and downstream textile mills hard to accept the surging cotton prices. Indian cotton supply may improve somewhat, but the limited available imported cotton also restrains its import growth. The sharp rise of local cotton prices may come to an end temporarily, and the stimulus to the ICE cotton futures is supposed to ease. Meanwhile, the import dependency is small, and the improvement for spinners to reduce cotton costs may be limited, and yarn prices are hard to decrease apparently. 

I. Indian cotton import change

Indian cotton imports have been constantly decreasing in recent years, down from 600kt in 2018/19 season to 190kt in 2020/21 season, with a fall of 69%. In 2021/22 season, imports were only 56kt by end Feb, down 17% from the same period of previous season, mainly due to the import duty of 10%-11% on cotton.

With the continual decrease of cotton imports, the import dependency has lowered from 11% in 2018/19 season to 3.3% in 2020/21 season, and decreased further to 1.0% in 2021/22 till Feb.

In terms of import origin, long staple cotton, like U.S. and Egyptian cotton, is its major import variety, mainly affected by its own supply structural problem and downstream demand.

II. Available cotton for India to import is limited

According to Cotton Association of India, Indian cotton imports are projected at 255kt in 2021/22 season, and imported cotton takes a share of 4.4% in consumption. Removing the import volumes of 56kt till Feb, it is hard to reach the projections in the next seven months based on the import condition in the same period of previous years.

1. Limited available export of U.S. cotton

By Mar 31, export sales of 2021/22 U.S. upland cotton and Pima cotton totaled 3.3352 million tons, about 103.9% of forecast export volumes (3.211 million tons), and export shipments amounted to 1.6724 million tons, about 50.1% of the total export sales. Export sales to India totaled 76kt, and 16kt was shipped. As China, Turkey, Pakistan and Vietnam has purchased large quantity of U.S. cotton, the available export volumes of U.S. cotton may be limited apparently, restraining India to purchase more U.S. cotton later.

2. India is difficult to purchase Brazilian cotton

2020/21 Brazilian cotton production has reduced sharply, and its cotton exports are also impacted. From Aug 2021 to Mar 2022, the cumulative export volumes reduced by 29% year on year, and the remaining volumes available for exports are also limited. In addition, Brazilian cotton is almost digested by China, Vietnam, Bangladesh, Pakistan and Turkey in recent years, seldom to be exported to India. Even India intends to increase imports from Brazil, it may meet large difficulty.

3. Australian cotton is a good choice

With the improved weather condition, ABARES predicts that Australian cotton production may recover to 1.158 million tons in 2021/22 season, and exports may rise to 714kt. Actually, monthly export volumes of Australian cotton have been high since this season, and the cumulative exports have risen by 437% year on year from Aug 2021 to Jan 2022. Export has great potential to grow. The reasons are not only the large rise of its production, but also the export restrictions to China.

Based on the imports of Australian cotton, normally, India only imports a small quantity of Australian cotton, while there is a short-term sharp rise in Sep 2016, with a volume of 83kt. India to waive the import duty on cotton this time may lead to the higher imports of Australian cotton.

III. Influence

1. Cotton

The reasons behind India to waive import duty on cotton may be more attributed to its supply structural problem and downstream textile mills hard to accept the surging cotton prices. Based on Indian cotton import change and available import sources, the import target of CAI may be reached this season, and the major import origin is likely to be Australian cotton. With the higher imports, Indian local cotton prices may be hard to keep up, and the stimulus to ICE cotton futures market may ease apparently.

2. Cotton yarn

With the higher cotton imports, the upward trend of cotton costs may be controlled effectively. But as the import dependency is small, the improvement may be limited. Downstream spinners may focus on cost control, and yarn prices may be stable overall.