Saturday, October 2, 2010

China may face cotton supply shortage

China, the world's biggest cotton consumer, may face a domestic supply shortage on falling output and reduced international supplies, an analyst at state-backed said. Domestic consumption may outstrip available supply by 3.5 million metric tons in the 2009-2010 marketing year ending Aug. 31, and supply will remain tight next year, Mei Yong, a director at the portal owned by China National Cotton Reserves Corp., said at an April 16 conference in Shandong.
China's double-digit economic growth is spurring textile consumption while cotton output last year shrank on reduced planting. Exports of products made with the fiber surged as textile buyers worldwide replenished inventories that had been depleted during the financial crisis, Mei said.
"China may need to import another 1 million tons" of cotton to bridge the gap, said Deng Jun, chief economist at Xinhu Futures Co. If China goes to the global market, it will further reduce projected low ending stocks in the U.S. and "U.S. cotton prices are very likely to surge" as funds won't let such a good investment opportunity pass, he said.
The most-active cotton contract in New York last traded at 80.75 cents a pound. Prices have gained 6.8 percent this year after surging 54 percent last year, the most since 1975.
Cotton for September delivery traded on the Zhengzhou Commodity Exchange may advance to more than 18,000 yuan ($2,637) a ton, or over 90 cents a pound for cotton traded in New York, Deng said. The contract settled at 16,790 yuan today.
New High
"Whether there is a shortage depends on how demand may play out going into August and September," said Dong Shuzhi, assistant general manager of Jinshi Futures Co., by phone from Shanghai today. It is possible that cotton may reach new high by August, he said.
Still, "much depends on the uncertain weather and economy, because unemployment in the U.S. remains high and unless global consumers start spending, exports may ''fizzle,'' he said.
Both Dong and Mei said this year's weather outlook so far for cotton planting isn't good because excessive rain and cold temperatures have caused delays.
This year may be ''a period of high cotton prices," Mei said, who along with Deng spoke at the conference, which was organized by Xinhu Futures.
China's cotton users currently have inventories that may last until July, Mei said, citing her firm's research.
Rising Demand
Yarn producers, who weave cotton into cloth, are racing to meet rising demand from apparel makers, said Liu Shuguang, a manager at Linyi Jinyuan Textile Trade Ltd. in Shandong, China's second-biggest cotton grower. "It's been a good year," he said.
Even if the government issues additional quotas, it is questionable buyers may be able to secure overseas supplies, Mei said. India, the biggest supplier so far in the current marketing year that began Sept. 1, has "basically closed its door" on China after it levied a 3 percent tax on cotton exports to ensure its own supply, she said.
The U.S., China's other big supplier, only has about 600,000 tons left for exports based on projected sales for the marketing year less what's already been sold, she said. West Africa, Uzbekistan and Brazil all have "little" output, while other Asian textile producers such as Pakistan and Bangladesh will compete "ferociously" for "limited global supply."
While it's possible the government may sell some of its reserves to boost supply, it will have little effect on the market because of its limited quantity, Mei said without saying how much the actual reserve is.
China's total exports of textile goods in the first quarter gained 15 percent from year ago to $39.2 billion, the National Development and Reform Commission said April 15, adding demand outlook may slow given uncertainty in global economic recovery.
Output of yarn, spun from cotton, gained 20 percent to 5.7 million tons in the first three months from a year ago while imports of cotton in the period gained threefold to 856,000 tons, it said.

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