China to Sell Over Half of Cotton Reserves
Move made to ease tight domestic supplies.
May 21, 2009
Yi Tian and William Bi
China, the world’s biggest cotton producer and user, will sell more than half its government stockpiles of the fiber in a bid to ease tight domestic supplies.
The government will sell 1.523 million metric tons, the China National Cotton Reserves Corp. and the China National Cotton Exchange said today in a statement. The total includes 1 million tons of recently harvested fiber at a minimum price of 12,900 yuan ($1,890) a ton, or 85.74 cents a pound, and 523,000 tons from earlier crops at a minimum of 12,500 yuan a ton, or 83.08 cents a pound, the organizations said.
“This is a heavy punch to the market,” Dong Shuzhi, a Shanghai-based analyst at Jinshi Futures Co., said by telephone. He said the market had expected sales of 500,000 tons, priced at more than 13,000 yuan a ton.
The auction of cotton reserves begins tomorrow, according to the statement posted on the cottonchina.org Web site.
“With this much more cotton coming to the market, it further dampens any hope that the government will issue any further import quotas,” Dong said. “This is bearish for New York cotton as well.”
Cotton futures for July delivery fell 0.37 cent, or 0.6%, to 56.78 cents a pound on ICE Futures U.S. in New York. The most-active contract has dropped 20% in the past year as the global recession reduced consumer spending on clothing and textiles. China is the largest buyer of U.S. fiber.
Zhengzhou Futures Fall
Cotton futures for September delivery on the Zhengzhou Commodity Exchange dropped 0.8% to 13,340 yuan a ton. The near-month July contract fell 0.4% to 13,060 yuan.
With current forward prices in China at about 87 cents a pound, tomorrow’s sale should “cap world prices until this cotton is absorbed,” John Flanagan, the president of Flanagan Trading Corp. in Fuquay-Varina, North Carolina, said by e-mail.
The government chose to announce the sale at a time when planting is almost over, so it wouldn’t diminish growers’ interest in planting the crop, Jinshi’s Dong said. The cotton is priced below the market, probably for the purpose of boosting profit margins for textile producers, he said.
By April, China’s state reserves had purchased 2.72 million tons of cotton, taking about one-third of last year’s output off the market in an effort to boost falling prices.