How will China influence the cotton market?

China , Commodities , Cotton Jul 29, 2013 No Comments

CottonThe December cotton contract closed below its 50- and 100-day moving averages at 85.24 cents and 85.72 cents on Monday, an indication of technical pressure in a market that has been largely range-bound in recent sessions. Trading volumes totaled fewer than 11,000 contracts, compared with a 30-day average of over 24,000 lots, preliminary Thomson Reuters data showed.

China probably will harvest 7.22 million metric tons in the 12 months that start Aug. 1, more than the 7.05 million forecast in June, researcher Cotlook Ltd. said yesterday in a report. Global production will exceed demand by 2.14 million tons, or 5 percent more than forecast last month, Cotlook said.

“People weren’t expecting those numbers,” Michael Smith, the president of T&K Futures & Options in Port St. Lucie, Florida, said in a telephone interview. “We’re going to continue to see increased supply and decreased demand.”

Cotton textile industry in China is facing difficulties as the sales have been poor due to domestic factors and weak recovery of the international market. Vice President of Fujian Hongyuan Group, Chen Cangsong, who is also the general-secretary of the Fujian textile and apparel business association, said slow demand from the global market, soaring cotton prices, high labor costs and the appreciation of the Chinese currency have led to fewer overseas orders.

As a consequence, the extent of China‘s willingness to keep on building its inventories, whose scale is a consequence of a price support programme for farmers which is under review, “remains unclear”, Rabobank cautioned. In 2011, the Chinese government purchased cotton for temporary state reserve in order to protect cotton farmer’s interests, which resulted into the rise of domestic prices of cotton compared to the global market.

“What is clear, however, is that pre-purchases of cotton for 2013-14 trail last year’s levels by close to 1m bales for the US alone,” the bank said.

“While it is too early to consider this forward indicator representative of China‘s demand profile for 2013-14, we expect the bulging ending stocks and a preference for high quality reserve purchases will limit China‘s imports to 7m bales.” That would represent a 55% fall year on year, taking imports well below the 11m tonnes that the USDA expects.

Slump in growth in China has emerged as a serious issue having a very negative bearing on any prospects of global economic growth. In fact, the slowdown in Chinese economic growth is raising serious concerns around the world. Last Thursday was the second day in a row that Chinese stocks suffered a loss in spite of several steps being taken by the government to prop up the economy which are said to include increasing exports and pouring money into the railways sector. However, the lure of profit taking on the equity market has restrained any further rise in shares prices. Furthermore, it has also been reported that manufacturing activity, including the cotton industry, in China has hit an 11-month low level in July 2013.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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