Global cotton demand rising even as China falls to decade low

NEW YORK: Global cotton demand will rise this year as rising consumption in countries like India and Pakistan offsets a drop in demand from China, the world's No. 1 producer and consumer, to its lowest level in a decade, a US industry body said on Saturday.

Chinese mills are buying less raw cotton because they are importing more yarn, a semi-processed product, or switching to cheaper man-made fiber. Mills are struggling because they have been hurt by Beijing's policy to support its farmers.

World mill use will increase to 108.7 million bales, up 2.5 percent from 2012, the National Cotton Council (NCC) has forecast. International mill demand outside of China is estimated to increase by 5.7 percent for the 2013 crop year, with more than half of the growth being accounted for by India and Pakistan.

But mill demand in China, the world's largest textile market, will decline 3 percent to 34.3 million bales in the 2012/13 marketing year. That would be the lowest since 2003/04 when the world's second-largest economy's massive boom was taking off and down almost a third from the 2007/08 peak of 51 million bales.

This demonstrates the ongoing shift in terms of where cotton is spun into yarn. With mill use rising and production falling outside of China, stocks excluding China will fall 4.4 percent to 39.3 million bales in 2013/14, the NCC said.

Even so, Beijing's massive strategic reserve and the government's buying program aimed at supporting the country's farmers will continue to dominate the coming marketing season which will start on Aug. 1 and end in July next year.

"The coming year is shaping up to be a challenging year where uncertainties regarding the market are magnified by the 40-million bale gorilla that is China's government reserves," NCC vice president for economics and policy analysis, Gary Adams, told merchants, farmers and mills at the council's annual meeting in Memphis, Tennessee.

Beijing has been paying as much as 60 percent higher than world prices for the country's crop as part of a program to support the country's farmers. Growers are considered crucial for feeding its growing urban population.

NCC economists assume China will continue to build government reserves, holding 38.8 million bales by the end of the 2013/14 marketing year.

With the strategic reserve buying most of the local crop at prices 40 cents to 50 cents above world prices, there is not much left for spinning mills to buy. Fabric manufacturers there are importing more yarn without incurring any duty.

FIERCE BATTLE

With elevated cotton prices in China stifling demand, its battle for market share with man-made fibers has never been more fierce. Even with a recovering global economy, it is hard for raw fiber to compete with lower-priced polyester, the NCC said.

China's current policy, while supporting prices received by farmers, acts as a tax on textile mills and has furthered the shift to man-made fiber.

Over the marketing years 2009 through 2012, mill use in China declined by almost 15 million bales, the equivalent to just under half the country's annual mill needs.

Over that same period, China's use of man-made fiber grew by 40 million bales, dropping cotton's market share from 30 percent to 19 percent.

"Both in the current marketing year and the year to come, the most important unknown is the extent to which China releases cotton from the reserves," Adams said.

In the current marketing year, which ends in July, the government has started sales, but it is still unclear if Beijing will tender more in the 2013/14 year.

Should the government choose to be a more active seller in the coming year, China's imports could fall to the required World Trade Organization (WTO) quota of 4.1 million bales.

However, China could also go to the other extreme and choose to sell little of their reserves. Under that scenario, imports could increase to levels comparable to this season.

"Such an outcome is more bullish for US exports in the short term, but the scenario only delays the inevitable outcome of working the cotton reserves back onto the market," Adams said.