Indian cotton ban a temporary apparel headwind?

NEW YORK (MarketWatch) � The apparel industry, which is counting on deflation in cotton prices to give it a second-half margin tailwind, may be faced with a temporary setback.

India, the world�s second-largest producer of the commodity after the U.S., banned cotton exports immediately until further notice. The country represents about 20% of the global cotton production, said Jefferies & Co. apparel analyst Randal Konik.

�Today�s news is very likely to have a bullish impact on the commodity�s price in the near term,� Konik wrote in a report. �It appears that India�s cotton was oversold prior to the announcement, causing further short covering in the near term.�

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Cotton for May delivery �jumped 4 cents, or 4.5%, to 92.23 cents a pound, hitting the ICE Futures U.S. exchange�s upper limit for a one-day gain. On a closing basis, it�s on track to make its biggest one-day move in just over a year.

Cotton prices, which rose to a peak of above $2 a pound last year, hurt apparel companies� profit and raised their costs as they juggled whether to pass on the higher costs to their still budget-conscious retail customers and shoppers.

Companies including athletic-gear giant Nike Inc. NKE �, Wrangler jeans maker VF Corp. VFC �, fashion designer Ralph Lauren Corp. RL �, teen retailer Abercrombie & Fitch Co. ANF �and Kmart parent Sears Holdings Corp. SHLD �were among those that cited a negative impact of last year�s cotton cost inflation on their margin.

As cotton costs have declined before the Indian export ban, VF and Abercrombie had been among those that projected a gross margin lift in the second half. See related story on the apparel industry�s other cost pressures.

With the jitters the ban has stirred in the market, Konik said he�s not concerned and still expects a cotton deflation benefit this year.

�Don�t worry just yet,� he said, adding he continues to be bullish on his coverage of the specialty retail universe. �The longer term supply and demand is less imbalanced versus last year and that specialty retailers should continue to see big tailwinds in the second half driven by easy (comparisons.)�

He said for one, the ban still has the potential to be revised as the move could significantly hurt India�s credibility in the trade market, leaving room for possible reviews and moderations to the ban.

Meanwhile, global supply is slightly higher than it was last year, helped by higher production in Pakistan.

�We think it�s possible for other countries to step up their exports to fill some of the shortage from India,� Konik said.

On the other hand, he said global demand decreased slightly from last year as apparel retailers have diversified into other fabrics.

That �puts them in a relatively better position to tackle the sourcing environment going forward if the cotton shortage continues,� Konik said.

�$1 cotton is most likely to prevail rather than last year�s peak of $2. The temporary increase in cotton prices is unlikely to outweigh the huge cotton tailwinds retailers will see in (the second half.)�

The stock market reaction also indicated investors are keeping a wait-and-see attitude.

VF was little changed. Jones New York parent Jones Group Inc. JNY �was down 1.4%. Nike inched up 0.3%. Ralph Lauren edged lower 0.3%. Abercrombie & Fitch rose 1.9%.