Cotton price declining on slower demand

The price of cotton – the main raw material for readymade garments – is on the decline in the international market as demand continues to drop after a big jump.

Demand for yarn and cotton is also decreasing in light of a drop in demand for apparels overall as a result of the Russia-Ukraine war.

People have lost their purchasing power after many countries hiked bank interest rates to tame inflation, which skyrocketed across Europe and the United States due to the conflict.  

Cotton importers say the price has dropped by $0.30 to $0.35 per pound in the last three weeks. It may decrease further in the next few days.

In addition, supply will be good as the harvesting season for cotton approaches and so there is no risk of major losses in production. Importers believe that the price of cotton will come down to a tolerable level.

According to the US Futures Index, cotton sold at the lowest price on Monday since September last year, falling to $0.94. However, it increased slightly on Tuesday.

The continuous price drop of cotton has provided garment entrepreneurs, the country's main export sector, with a breather. But in a span of just two months, the country's textile spinning mills have to sell per kg of yarn at a lower price of $0.70 now.

Fazlul Hoque, managing director at Israq Spinning Mills Limited, told The Business Standard, "Cotton prices have been declining for the past two weeks. The main reason is that the US has raised interest rates, causing speculators (a type of brokers) to cut cotton purchases. Besides, the declining demand for garments in the world market is also one of the reasons behind the fall in cotton prices."

"The government has raised interest rates to stem rising inflation in the United States, reducing people's purchasing power," he added.

Md Fazlul Hoque, managing director of Plummy Fashion Limited, one of the greenest readymade (RMG) factories located in Narayanganj, said, "Cotton prices have risen unusually over the past year, mainly due to rising demand. Now demand for clothing is decreasing and demand for cotton is also on the decline. As a result, the price of cotton is also decreasing."

Cotton shipments will get underway in early 2023 for importers who book it at the prevailing price. This is known as forward booking.

A further $0.20-0.30 per pound is added to the cotton index as shipment charges, C&A costs and other costs, known as C&F price.

In other words, if anyone from Bangladesh wants to import cotton, the money will be added to the index price, which will be the cost until it is brought to Chattogram port.

According to the country's spinning mills owners, the price of cotton has been increasing since June-July last year. Those who booked cotton last February had to pay around $1.70 per pound (C&F price).

Khorshed Alam, chairman of Little Star Spinning Mills Limited, told TBS, the mills had to open letters of credit (LCs) at $1.67 per pound of cotton last April. At the time, the price of cotton was $1.43 and C&F price was $0.25.

On Monday, the cotton price was $0.94 per pound, and, after the C&F price of $0.30 was added to it, the rate rose to $1.24.

Yarn and fabric prices have started falling in the local market even before the price of cotton has come down. According to industry insiders, the price of yarn is declining almost every day. 

Fazlul Hoque, who is also a vice-president of the Bangladesh Textile Mills Association (BTMA), said, "The yarn (30 counts carded) that used to sell for about $5.20 per kg two months ago has no buyer available to purchase it for $4.50 now. That means the price of yarn has dropped by $0.70 per kg in a span of two months."

Textile millers said that buyers of yarn are not giving LCs even after taking Proforma Invoice (PI) due to the constant price decline. PI is the initial negotiation price and quantity on the basis of which the LC is issued in favour of the buyer after a certain period of time.

Just seven or eight months ago, when the price of cotton was on the rise, the opposite happened. In other words, garment manufacturers complained that spinning mill owners had increased prices even after giving PIs, saying they had no yarn in stock.

Bangladesh is the second top cotton importer in the world. In 2021, it imported about 8.2 million bales of cotton. Textile millers expect cotton imports to reach 9 million bales this year.

Due to increasing demand in the country, a large number of textile mills have been established in the last two decades. According to BTMA, there are more than 1,500 textile mills in the country, including spinning, fabric, dyeing-printing and finishing, which are members of the organisation. There are about 1,000 more mills that are relatively small.

According to BTMA, the total investment of textile mills in the country is about $7 billion. A new investment of about $2.5 billion will be there in the next two years.