White gold in vogue

The second round of the commodity bull-run has begun. With metals such as gold, silver and platinum are aggressively racing forward, cotton seems to be following close behind as, last month, futures for the commodity rose to levels not witnessed since 1995.
Cotlook A Index - an index representative of global cotton prices - averaged around 104.73 cents per pound in September. It had rallied nearly 63 percent in the past year alone.
Market participants blamed tight fiber stocks and interference by investment funds for the rally, as long-index funds and hedge funds have been seen increasing their stake in cotton. On the other hand, the International Cotton Advisory Committee (ICAC) attributed the cotton run to strong market fundamentals rather than speculation.
Much of the flurry in the yarn market was sparked after two major cotton-producing countries, China and Pakistan, reported crop losses on the heels of bad weather. Cotton production in Pakistan is expected to knock off by 3 percent to 9.3 million bales in FY11, with import dependence increasing by 29 percent to 1.8 million bales.
Panic buying in the international market, along with growing fears of tight supply conditions, has also created a stir locally, with fiber changing hands at towering rates, averaging around Rs6813 per maund in September and currently hovering around Rs7000 per maund.
Although, world cotton output is seen improving by around 15 percent to 116.6 million bales this year, it may not be enough to clamp down on yarn prices as global consumption is also expected to grow by around 3 percent to 120.7 million bales.
The gap between mill-use and production will talk down global stockpiles, attenuating global ending stock to 44.6 million bales for the year ending July 31, the lowest level in 14 years.
With the global stock-to-use ratio hovering around 37 percent compared to an average of 50 percent in the past five years, fiber prices are likely to remain high. The ICAC Price Model forecasts a 2010/11 season-average Cotlook A Index of 90 cents per pound, 15 percent higher than last season and the highest since 1994-95.
Cotton spike, along with rising inflationary pressure will continue to twist the local industrys arm. However, the dwindling rupee, together with the duty wavier given by EU, may improve competitiveness of textile manufacturers in foreign markets.
Having said that, though local cotton prices are likely to witness a slight correction in the coming few weeks, overall the price trend will remain tight.