February 28, 2013
With the accumulation and distribution of global inventories of cotton being directly contorted by Chinese policies, Beijing seems akin to the puppeteer that likes to keep a good grip on all the strings in its hands. The worlds largest fiber producer, the weight that Chinese policies bear on the international cotton prices has been highly instrumental in tuning the dynamics of the market in the 2012/13 season which saw stocks increase despite a fall in production and rise in consumption.
With Beijing offering domestic cotton farmers $1.47/ lb (20,400 RMB/ton of lint) during 2012, the state run support programme has kept prices at home nearly 40 percent above the market clearing levels.
And as the state purchases the lions share of the crop for its reserve- essentially isolating the largest proportion of domestic supply from the market- Chinas imports soar, magnifying the policys impact on the world markets. Moreover, while the policy - artificial inflation and all- is designed to lend a breather to farmers, it also acts much like an unwarranted tax upon the Chinese mills which are being pushed to move to either man-made fibers or buy from international sellers.
This inadvertent support to mill demand in other countries has however come as nothing short of a boon to some. While Chinese mill usage declined by nearly 15 million bales during the year, international mill demand outside of China has grown by leaps and bounds and is expected to increase by a further six percent for the 2013 crop marketing season.
And accounting for nearly half of this growth will be Pakistan and India where the spinning of raw cotton into yarn is becoming as profitable a business as it can get. With favourable differences between yarn value and raw fibre prices, spreads for spinners in the region keep improving as Chinese mills come seeking cheaper alternatives.
Meanwhile at home, Chinese mills complain of eroding margins as the spinning industry has become largely defunct, with the weight of rising labour cost, a limited access to cheaper imports and the low quality of state auctioned reserves putting pressure on the price differentials between yarn value and cotton prices. The key uncertainty prevailing in the scenario as of now remains the Chinese governments stance on the auction of state reserves and the allocation of import quotas. In a bid to silence the complaints by millers, Beijing is said to be mulling over a proposal which will allow textile mills to import one ton of cotton for every three tons that they buy from the state reserve.
However there is much speculation that the government will want to further limit imports in a bid to sell off parts of the tottering pile of reserves it has collected over the year. Having amassed 40 million bales by July 2012, Chinese government is forecasted to add another 12.5 million bales to its total ending stocks during 2012/13. So no matter which way the decision swings, as of now the clear indication by the Chinese government to continue its support price policies will make sure that the over-fed elephant that is the Chinese state reserves will make for a challenging time ahead for cotton. (Source: Business Recorder)