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Changes in Chinese cotton policy imminent?

15 July 2013

According to press reports on analysis from the commodity division of Commerzbank, China’s domestic cotton policies are attracting criticism from the Chinese textile industry over the high domestic cotton prices that the policies gives rise to. The Chinese government has recognised that its current policy places Chinese textile millers at a distinct competitive disadvantage. In June 2013, remarks from a senior trade official revealed that China “was considering reforms to its controversial stockpiling programme”. The high domestic price policy (150 US cents/lb compared to New York futures prices of 84.75 c/lb) has generated cotton stock levels “equivalent to well over one year’s supply” and, at 10.5 million tonnes, accounting for “more than half” of world stocks. The policy has also led to Chinese textile producers turning to imported cotton, which is cheaper, even with the payment of out-of quota duties. This has seen a sevenfold year-on-year increase in Chinese cotton imports to 757,000 tonnes by April 2013.  

The difficulties thus generated for Chinese textile manufacturers, along with wage inflation, have eroded the competitiveness of Chinese textiles on international markets. This is leading the US Department of Agriculture to forecast further declines in China’s cotton consumption in 2012–13 for the third year in succession.   This perspective in the medium term was confirmed by the OECD/FAO Agricultural Outlook report for 2013–2022, which projects a 17% decline in Chinese cotton production (21% decline in land under cotton cultivation), in the face of an “intensification of competition in textiles from India and other countries with lower labour costs”. This decline in Chinese cotton production is seen as reversing the trend of the last decade.  

In the short term, investors are concerned that any mishandling of policy reforms to reduce stocks and lower prices to Chinese textile companies has “the potential for a price collapse”. It is feared that planned sales of cotton from Chinese stocks could trigger “a sharp fall in local prices”, although this is “the exact opposite of what the government wants”, since the cotton reserve policy was intended “to guarantee a reliable income for [China’s] cotton producers”.  

These developments need to be seen against the background of a further 7% reduction in the International Cotton Advisory Committee’s (ICAC’s) cotton price forecast of average prices for 2013–14 on its Cotlook A index. This downgrade in price projections came on the back of an increase in ICAC projections of world stocks to a record 18.64 million tonnes.  

Editorial comment

Any dramatic fall in domestic Chinese cotton prices could induce a reversal of the growth in Chines cotton imports and remove a major source of that demand that has helped support cotton prices. According to commodities website Indexmundi, cotton prices had been recovering since the lows of November 2012 (+16.8% between November and March 2013) but have come under slight pressure since (falling by 2% to the beginning of June 2013).

Chinese policy over the past 2 years has undoubtedly contributed to maintaining international prices at an artificially high level. Although no details have yet been announced by the Chinese government, policy reform in this area could lead to a fall in prices. However, this will not occur during the year in progress. Beijing has already announced that it will continue to buy domestic cotton at a price of 20,400 yuan ($3,300) per tonne during 2013/14. In addition, the sale of cotton from China's reserve stocks, some 2.5 million tonnes to date, had not by April produced any sharp fall in Chinese cotton imports. In fact, imports had climbed to 757,000 tonnes by that date, a sevenfold year-on-year increase. Finally, the China Cotton Association estimates that a decline in the area under cultivation will see annual production fall by approximately 5% to 6.5 million tonnes, against estimated consumption of approximately 8.5 million tonnes.

For the CFA franc zone, a reversal in Chinese policy and any subsequent fall in prices should have little effect during the market year 2013/14. Over the past 3 years, the CFA zone has been working with some success to reinvigorate cotton cultivation. Although the majority of cotton spinners have implemented a modest decrease in farm gate prices, these remain higher than they were during the global economic crisis and continue to provide an incentive to growers. Initial forecasts from the cotton spinners are all predicting that production will grow in 2013/14, with a year-on-year increase of 20% to 2,160 million tonnes (1,797 million tonnes in 2012/13 and 1,401 million tonnes in 2011/12) for the West African CFA zone as a whole. 


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