Review and Outlook of China Cotton Market
A host of variables are in play for the world's largest producer, importer, and consumer of cotton.
June 30, 2010
The China cotton market still looks bullish, though a number of uncertainties linger on. Tight supply from cotton imports, fast growth of cotton yarn exports, and the delayed cotton planting will support cotton price. However, the uncertainties of RMB appreciation, macroeconomic policy to prevent inflation, and the acceleration of the cotton shipping from Xinjiang to inland area should be noted.
1. Domestic cotton price goes up constantly
Domestic cotton price has been going up for one month. On May 5, CNCotton B Index (average price of T328 in inland area) was 16,304 yuan/ton, up 3,397 yuan or 26 percent from the beginning of this marketing year (September 1, 2009); the most active cotton futures contract of Zhengzhou Commodities Exchange (ZCE) was 16,705 yuan/ton, up 3,410 yuan or 26 percent; and the most active contract of the State Cotton Exchange (SCE) was 16,790 yuan/ton, up 3,775 yuan or 29 percent.
2. Cotton import increases significantly
According to China Customs, China imported 323,000 tons of cotton, up 225,000 tons or 227.9 percent from year ago. The cumulative cotton import during the first quarter of 2010 is 856,000 tons, up 586,000 tons or 217.3 percent from year ago. As of the end of March, the cumulative cotton import of 2009/10 marketing year reached 1.406 million tons, up 667,000 tons or 90.1 percent from year ago. Imported cotton remains attractive to Chinese textile mills. On May 5, the International Cotton M Index (average price of middling grade at major ports in Asia) was 87.74 cent/lb, equivalent to 15,868 yuan/ton based on sliding-scale tax, 436 yuan lower than CNCotton B Index.
3. Yarn production increases rapidly
According to the National Bureau of Statistics (NBS), China yarn production was 2.16 million tons in March, up 535,000 tons or 33 percent from February. As of the end of March, the cumulative cotton yarn production of this marketing year reached 14.61 million tons, up 18 percent from year ago.
In addition, according to China Customs, China exported 54,955 tons of cotton yarn, almost as twice as much of February. As of the end of March, the cumulative cotton yarn export of this marketing year reached 307,766 tons, up 31 percent from year ago.
1. Macroeconomic control affects cotton price
China’s GDP growth during the first quarter of 2010 is 11.9 percent, much higher than year ago. In order to prevent inflation and stabilize the growth of national economy, the central bank of China has decided to increase the deposit reserve ratio by 0.5 percentage point to 17 percent from May 10 on. This is the third time it has raised the deposit reserve ration in 2010, which has been very close to the highest record of 17.5 percent in Chinese history. The above macroeconomic control may further restrict the liquidity and cool down the economy to some extent. As a result, it will probably put a curb on cotton price hike.
2. Stagnant textile export growth is noted
According to China Customs, the textile and apparel export of China totaled US$11.00 billion in March, down 12.93 percent from February and 9.54 percent from a year ago. From September 2009 to March 2010, cumulative textile and apparel export reached US$101.36 billion, up 1.04 billion or 1.03 percent from the same period of last marketing year.
The second session of No. 107 Canton Fair was ended on April 27. The number of foreign buyers and export value was respectively up 1.7 percent and 2.1 percent from last year. However, the export to EU, U.S. and Middle East was down from last year. In consideration of RMB appreciation and uncertainties of relevant policies, short-term contracts are in majority. Chinese textile mills and apparel makers find it is very difficult to raise their price in near future, so they will probably suffer from higher production cost.
3. Domestic cotton supply remains tight
According to the estimate of China National Cotton Market Monitoring System (NCMMS), the cotton consumption of China in 2009/10 marketing year is 10.21 million tons, and the production is 6.76 million tons (NBS estimate is 6.40 million tons), showing a gap of 3.45 million tons.
To offset the tight supply, the cotton shipping from Xinjiang to inland area is speeded up. According to NCMMS, 1.30 million tons of cotton remains in Xinjiang. However, it’s difficult to fill the huge gap between supply and demand. Under such a circumstance, it is possible for the Chinese government to take relevant measures to satisfy the cotton consumption, such as the allocation of cotton import quota or selling cotton reserves.
4. Cotton planting
According to NCMMS survey in April 2010, the cotton acreage intention in 2010 is 78 million mu (5.2 million ha.), up 0.56 percent from 2009, down 2.07 percentage point from the survey in December 2009. As the cold weather persisted in April, cotton planting is delayed nationwide. In Yangze River reaches, cotton planting is delayed by 10 days; in Yellow River reaches and north part of Jiangsu province, it is delayed by 10-15 days; and in north Xinjiang it was delayed by 20 days or so. The delay of planting may give rise to a serious impact on cotton production. In the face of such a situation, we find it’s difficult to give an optimistic estimate of cotton production in 2010/11 marketing year.
Gong Wenlong is CEO of the China National Cotton Information Center; and Director of the National Cotton Market Monitoring System (NCMMS), an e-government project built by the National Development and Reform Commission.