The immense potential of cotton to clothe is well known across the globe. However, a not so popular use of it is in the form of linters – a byproduct of the cotton oil extraction process – that has great demand in the international market, particularly in China. And all an exporter of cotton linters needs is some patience before he can laugh all the way to the bank

Himanshu Vatsa | June 2015 Issue | The Dollar Business

From the blue denim in your wardrobe to the soft towel in your bathroom, from crisp currency notes in your wallet to pharmaceutical drugs in your first aid boxes (yes, cotton is used in the production of currency notes and several drugs), cotton’s omnipresence in our daily lives cannot be ignored. While India’s domination of the world cotton market – the country is the world’s second largest producer and exporter of cotton – is pretty well known, not many know that India is also the world’s second biggest exporter of cotton linters – a byproduct of the cotton oil extraction process.

Devil & deep sea

Cotton linters are silky fibres extracted from the outer coating of cotton seeds through ginning. A 5-6% byproduct of the cotton oil extraction process, cotton linters are extensively used in the manufacturing of stamp papers, currency papers, and as cellulose in the chemical industry. Cotton linters are also used in the wood, food, chemical, pharmaceutical and ammunition industries. But the issue with them is that neither do they represent a big market – total cotton linters trade has never even hit the half a billion per annum mark – nor are there many countries that import them – China has consistently been importing over 50% of the global cotton linters exports.

Hence, India’s cotton linters exports suffer from the typical issues that one associates with any product that has just one major market. For, not only do India’s cotton linters export volumes dance to the tunes of Chinese policy changes, but their price realisation is also very volatile, giving its exporters nightmares. For, while FY2010 suddenly saw an over 4.3x jump in export volumes, it was followed by two years of flat to negative growth. Similarly, although the export price realisation for cotton linters saw an over 88% y-o-y jump in FY2011 to $1.1 million/thousand MT, the same collapsed in the subsequent years and was just $0.4 million/thousand MT in FY2014.

 

Why doesn’t Indian cotton linters exporters diversify into other markets then? Well, the answer is simple. Since many countries, including the European Union, have banned the imports of genetically modified cotton products, there’re not many markets where Indian cotton linters can go. India’s cotton linters exports are also affected by the Indian government’s stringent trade restrictions and its lack of support to producers.“The government should support us in exporting these products by extending exporting incentives and minimising trade restrictions,” P. Koti Rao, Director, Tirumala Cotton and Agro Products Pvt. Ltd., tells The Dollar Business.

Explaining the potential of cotton linters exports, and citing the steps that are needed to realise their potential Rao adds, “The value addition in cotton linters can be up to 400%. But a lot needs to be done by the government. It should help in setting up factories, providing statutory clearances, installing effluent treatment plants, besides assisting the industry financially.”

Home run

At a time, when Chinese demand has been all over the place, cotton linters producers in India have found some solace in the domestic market, particularly in ordnance factories. Similarly, industry insiders feel if instead of printing a majority of currency notes abroad, if the Indian government can print some of them at home, cotton linters producers would get a big and ready market. Not only will this reduce the country’s overall import bill, but also give cotton linters producers much needed breathing space.

 

Just a puppet

Another reason why India’s cotton linters exports are faltering is because they are just a byproduct. Hence, unless there is a huge demand for them on a standalone basis, their production is just a function of the production of cotton oil. If the production of cotton oil is high, the production of cotton linters will automatically be high and they would be sold off at any price buyers are willing to buy at. On the other hand, if there is a dip in the production of cotton oil, the production of cotton linters will also dip. Hence, for exports of cotton linters to pick up, it is necessary that they have a market of their own. Though some markets exist, the product suffers from frequent policy changes in China and a ban on genetically modified Indian cotton in several countries. In fact, just how inferiorly the world treats Indian cotton linters can be gauged by the fact that while the average unit value of USA’s cotton linters exports, in CY2013, was $577/MT, the same for India was just $393/MT!

 

Wait and watch

In volume terms, in the last 10 years, India’s cotton linters exports have seen a y-o-y dip in five years! Similarly, each of the last four years, between FY2011 and FY2014 (both years included), have also seen a y-o-y drop in per unit realisation. Given this, Rao has a word or two of caution and advice for those looking at getting into the trade. “Remember, linters are just a by-product of the cotton seed, i.e., just about 5% of the cotton seed ends up as linters. The remaining 95% also have various uses,” he says. What this essentially means is that getting into cotton linters exports on a standalone basis is not very advisable. For, not only can demand be erratic and bumpy, but so can also be price realisation. However, cotton linters is something that an exporter of other goods should keep an eye on. For, you never know when there can be a sudden spike in demand, as it happened in FY2010, or a sudden spurt in prices, as it happened the following year! And that needs the patience of a hermit.