Issues Faced By Exporters

1. Issues Faced By Exporters Presented by: Peter Bunce General Manager - India Noble Cotton 20.12.08

2. Content 1. Global Scenario 2. Indian Scenario

3. Issues Faced By Exporters1.Global Scenario

4. Global Scenario - Overview • Severe reduction in cotton demand, bearish market • Global recession -poor US/Europe retail demand • Credit crunch/financial meltdown • Poor mill margins leading to industry rationalisation • Market volatility – mills/trade reluctant to carry inventory • Narrow futures spreads – merchants reluctant to carry • Industry rationalisation – mills/trade (Weil/Reinhart) • Contractual defaults – ICA flooded with arbitration cases • Government intervention • Widespread pessimism

5. Global Scenario - Demand • Imports lowest in 4 years • Quota restrictions • Funding – high funding costs and reserve ratio

6. Global Scenario - China Business is getting tough in China; • Contractual defaults – merchant provisions in the millions • Consumption cut 30% to 7.5MMT, Production 7.7MMT, Imports ? • State Reserve 1.27MMT, expecting 2.7MMT (160 Lac Indian bales). • Quota ends 31st Dec’08. First batch 8.94 Lac MT may not be released until March/April 2009. • CIQ registration required for shippers • AQSIQ tough rules, quality match contract, <3% weight loss, contamination etc. Classified A,B,C and published.

7. Global Scenario – Government Intervention Governments Purchasing • Uzbek – Gov’t sold 40k MT out of 1MMT (October) • Turkmenistan – Gov’t holds all 300k MT • China – Gov’t purchased 1.27MMT. Possible 2.7MMT • US - 4.5 million bales in loan & 860k bales cert stock • India – MSP purchases so far 380 Lac bales. Possible ?? It’s becoming increasingly difficult for private traders to predict and especially compete with taxpayer-funded Government entities.

8. Global Scenario – Price Volatility • ICE/NYBOT Highs of 91 (Synthetic 110), Low 36.70 • Futures detached from physical prices • Merchants lost hundreds of millions in 1 week!

9. Global Scenario – Price Volatility ICE/NYBOT 30 Day Volatility 2008 • Unprecedented high volatility in Feb/Mar and S/O/N/D

10. Global Scenario – Price Volatility ICE/NYBOT 30 Day Volatility 2006 2007 2008

11. Global Scenario – Mill/Retailer Margins

12. Global Scenario – Merchants The overall effect of the global issues on merchants means; • Merchants (and mills) won’t carry large inventory due to credit restrictions, carry cost & the volatile market • Merchants unlikely to extend credit to counterparties • The industry will insist on safer trading terms and restrict forward sales/purchases to manage defaults • Won’t take positions due to Government unpredictability • Overall reduction in volumes and margins • Further Industry rationalisation • But things WILL improve

13. Issues Faced By Exporters2. Indian Scenario

14. Indian Scenario – Noble Background • India 5% of Noble Groups US$30 Billion turnover - Growing • Vice Chairman Harindarpal “Harry” Banga is Indian • 16 offices, 3 crushing plants • 70% of our 5000 strong global Fleet Management crew trained in India • Coking Coal 500,000MT, Grain & Edible Oil 500,000MT • Largest buyer of Iron Ore • Chemicals, Carbon Credits, Coffee • Cotton

15. Indian Scenario - Overview Many issues the same as International market; • Severe reduction in cotton demand, bearish market • Global recession -poor US/Europe retail demand • Credit crunch/financial meltdown - India • Poor mill margins • Market volatility – mills/trade reluctant to carry inventory • Contractual defaults • Government intervention

16. Indian Scenario – Government Intervention Legislation; • Sept’08 MSP Revision • July’08 Contract Registration • July’08 Abolish Customs Duty on Raw Cotton • June’08 Removal of Export Duty Drawback • FMC de-listed futures trading on wheat, rice, soy oil, rubber etc While most changes have good intentions, this changing environment breeds opportunistic business and discourages investment. This has long term negative implications.

17. Indian Scenario – Government Intervention Effects of high MSP • CCI & NAFED/ MH Fed hold over 50% of crop. Could increase. • Indian prices kept artificially high compared to International levels. Indian not competitive….yet. (slide) • Domestic trade/ginners volume diminished significantly • Distorted market signals – nobody willing to carry

18. Indian Scenario India slipped to 20th place

19. Indian Scenario *Source: Monthly Statistics of Foreign Trade of India, DCGI&S, Kolkata and the Office of Textile Commissioner, Mumbai • Comparable to 2003/04 when YTD exports totaled 12 Lac • Timing

20. Indian Scenario High MSP has restricted trade making India less competitive. Let’s just hope that it encourages farmers to grow more cotton for India to be competitive in the long-term.

21. Indian Scenario Finance • Interest rates 15% vs International rate 8% • RBI restrictions – FX, control etc - sometimes a positive Weight Loss • Amongst highest of the major producing countries • 2007/08 Average >1.1%, High 5% Intensive Logistics • Large distances, average infrastructure (road/rail/ports), customs regulations • Poor warehouses, lack of FF systems, control etc = insurance difficulties

22. Indian Scenario Quality Control • Comparatively difficult to manage quality & contamination • Reputation damage, China AQSIQ rating • Indian cotton can’t reach full price potential (2-3c below WAF, US) Fragmented Industry • Millions of farmers and thousands of ginners, spinning mills, traders, agents etc. • Each state, district and taluka has differences in quality, language, culture and trading practices. • Difficult to implement change/improvements (quality, agronomy, weight loss, contamination etc)

23. “When you know the country it gives you an edge over the competition who don’t know it or don’t know how to handle it” Harindarpal “Harry” Banga, Vice Chairman, Noble Group