China Purchase of U.S. Cotton Shocks Industry Veterans
Demand for cotton remains weak among China’s mills, so the market – despite responding quickly and strongly to the massive purchase – is likely to remain choppy.
June 27, 2012
It will always be a bit of a surprise when a country that has declining demand and rising stocks makes a large, sudden purchase of cotton. When that country is the largest producer, importer and consumer of cotton – and the purchase totals more than 740,000 bales – the surprise is anything but little.
That was the case earlier this month, when China purchased more than 93% of the 795,000 bales exported by the United States the week ending on June 7. It has long been believed that China would continue to grow its reserves – possibly by adding as much as 1 million tonnes of U.S. cotton – but the suddenness and size of this recent purchase left even the most experienced industry veterans stunned.
“I was definitely surprised by the China purchase,” Antonio Esteve, president of the International Cotton Association and head of the Ecom Cotton group, told Cotton International. “The country already owns massive amounts of cotton, and while their reserve stocks keep going up, their domestic cotton consumption is going down. Their action indicates a willingness to continue to support prices by hoarding excess cotton – especially from the United States. China’s policy is going to continue to be the most important market factor in the weeks and months to come.”
While the news drove cotton prices to their highest levels in a month, it’s unclear how long the increase will last. In all likelihood, China made the purchase to take advantage of the depressed prices, which hit a 31-month low earlier in June. Demand for cotton remains weak among China’s mills, so the market – despite responding quickly and strongly to the massive purchase – is likely to remain choppy.
“China’s reserve policy remains difficult for the market to digest,” said Ernie Schroeder, CEO of Jess Smith & Sons Cotton. “They purchased large amounts this past season, and intend to increase the grower support price this fall.” He added that the sale increased U.S. new crop commitments to their second-highest level at this point of the season, exceeded only by last year’s total.
The cotton traded on the New York Intercontinental Exchange (ICE) costs about half as much as it does in the exchange in Zhengzhou, and is still about 20% cheaper than buying domestic cotton in China – even after adding in the logistical and transportation costs associated with shipping the fiber halfway around the world.
McCue is the editor for Cotton International magazine. A 20-year veteran of the national trade press, he joined CI in 2010. During his career, he has won a variety of editorial awards for covering industries such as food and drug packaging, the U.S. healthcare system, and sales and marketing management.