Two months ago, one wouldve been envying all investors who stocked up generously on cotton. Today, the envy has likely turned into pity for those who indulged liberally in the commodity.
From a record of $2.44 per pound reached on 8 March 2011, global cotton prices went as low as $1.73 per pound last Thursday, souring the aspirations of all looking at the commodity as an instant get-rich formula.
The slump was mainly triggered by lower demand from China, the largest cotton consumer of the world, due to sufficient stocks of raw cotton and cotton yarn at home.
Besides this, the slower rise in yarn prices relative to cotton also left many mills cash-strapped. Consequently, gravely affected mill use and slowing down of mill operations stunted demand, globally.
Combined with a greater use of chemical fibres, global use of cotton is expected to stay at around the same level in 2010-11 relative to 2009-10, while a better estimated world cotton output - a record of 27.6 million tons in the year beginning from August 2011 - brought more woes to bulls in the cotton markets.
The local cotton market, closely mirroring global trends, witnessed a striking southward journey too. After hitting a phenomenal Rs13,000 per maund on 9 March 2011, the prices were sitting at Rs9,000 yesterday - a slump of over 30 percent within two months.
While the downwards international trend, which the local market closely follows, is one of the reasons for the decline, a better production forecast for Pakistan - a record of 15 million bales in 2011-12 - is also to be held accountable.
Local mills which had stocked up cotton for the coming months, have been affected quite adversely, since they are sitting on stocks purchased when the prices were quite high, and selling off those now without incurring a loss will be, obviously, difficult.
"The market is in doldrums and mills have slowed down," said Iqbal Umar, ex-Chairman, Karachi Cotton Association (KCA).
Naseem Usman of the KCA also supported this claim, adding that mills were the most at loss with some having stocked enough cotton for 2-3 months. "The rise in cotton prices witnessed a few weeks back was abnormal. The prices will rationalise in the coming days," he remarked.
Exporters, however, are yet to see the bad days. Ibrahim Mahmood, research officer, Pakistan Readymade Garments Manufacturers & Exporters Association, told BR Research that exporters have been doing well so far.
But he fears that exporters might be hit 2-3 months down the road as the slowdown in global demand affects their sales.
Despite that, nothing concrete can be said about future cotton prices, which are still at pretty high levels and which have set a great example of how cruel uncertainty can be.
But looking at the production forecasts and greater usage of chemical fibres, along with an estimate of a Bloomberg survey that "the fiber may plunge to $1 per pound by December 31", it does seem that the bears are gradually taking charge.
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