February 11, 2013
China's demand for cotton is helping give the global market for the commodity a boost. The country's textile mills are importing more cotton than many investors and analysts had expected. This large appetite for imports from the world's biggest cotton consumer, combined with rising consumption of the fiber globally and a decrease in U.S. plantings, has fueled a rally in cotton prices.
Cotton plantings are forecast to fall to the lowest level since 1983, down 27% from 2012, according to estimates from the National Cotton Council, an industry group. Prices have risen 17% since Aug. 1, the start of the new marketing year, and are near a seven-month high. On Monday, cotton for March delivery rose 0.25 cent, or 0.3%, to 82.92 cents a pound.
For much of past year, China snapped up cotton for its strategic stockpiles, which are forecast to be at a record level at the end of the current marketing year on July 31. With the country's warehouses brimming with cotton, many investors believed the country's mills would turn to these stockpiles for their needs. But the mills instead are importing, especially from the U.S., the world's biggest cotton exporter.
The reason: Mills can get better-quality cotton abroad for roughly the same price. "Chinese demand is going to be a big player" in the cotton market, said Jimmy Tintle, a speculative investor and chief executive at consulting firm GreenKey Alternative Asset Services in Longwood, Fla. "And I'm not looking for weaker demand, that's for sure."
Mr. Tintle recently placed bullish bets, which profit from rising prices, on cotton futures. He expects prices could rise as high as 95 cents to $1 a pound by May. Prices last traded in this range in January 2012. Hedge funds and other money managers are holding 59,998 net bullish positions valued at $2.5 billion, a nearly 29-month high, according to the latest data from the Commodity Futures Trading Commission.
Many investors are monitoring the results of China's daily auctions of stockpiled cotton run by the China National Cotton Reserves Corp. Mills have taken only a third of the cotton put up for auction since the beginning of the year. During the sales, China's state cotton agency discloses how much it offered, the quality of cotton, the average length of the fibers, and the average price paid.
All the cotton put up for auction has been of below-average quality. The average price at China's auctions through Feb. 1 has been $1.3534 a pound. Cotton imports cost mills about the same, taking transport costs, a 40% duty and taxes into account, according to cotton traders and merchants. Imported cotton tends to have longer fibers, which mills covet because it makes the fiber easier to spin and dye.
The lackluster cotton auctions in China have coincided with a boom in U.S. cotton export deals. Since early November, U.S. exporters have struck deals to sell 3.8 million bales, with 35% of that slated to go to China. Analysts at INTL FCStone Inc. INTL +0.06% said the size of export sales has exceeded forecasts. In 2012, U.S. cotton exports to China climbed 60% from the previous year to 6.9 million bales.
On Friday, the U.S. Department of Agriculture estimated that China's total world-wide imports would reach 14 million bales of cotton in the current marketing year, a 12% increase from its forecast in January. One bale of cotton weighs 480 pounds. But in recent weeks, China has started to offer higher-quality cotton to the mills, a move that could drive down prices.
Jordan Lea, co-owner of cotton seller Eastern Trading Co. of Greenville, S.C., said just the existence of China's stockpiles could exert downward pressure on prices. China has enough cotton in warehouses to satisfy five or six years of demand from its mills, Mr. Lea said.
"We're just a little bit anxious [China's] going to keep their best interests at heart," he said, adding that he has placed bearish bets on cotton. "And I don't know if their best interests are my best interests." Still, other factors are giving cotton prices a lift.
The global clothing industry is staging a strong recovery from the world-wide recession of the latter part of the last decade, boosting cotton demand. The International Cotton Advisory Committee, an industry group, forecasts global textile consumption will increase 6.1% in 2013 to an all-time high of 80 million metric tons, with cotton fiber accounting for 32% of the market.
"Demand is there, world-wide," said Craig Pace, a senior broker at Chicago brokerage United Futures Trading Co. He has placed bullish bets on cotton in the options market and expects prices to trade between 83 cents and 88 cents a pound over the next six months.
(Source: The Wall Street Journal)