China may import 800,000 T cotton in 2011/12 for reserves

Wednesday, 16 November 2011 14:46

BEIJING: China may need to import 700,000 to 800,000 tonnes of cotton to restock state reserves in the crop year that began in September, but a strong harvest means it is unlikely to make any major purchases in the near term.

Current stockpiles at the China National Cotton Reserves Corp. (CNCRC) are estimated at around one million tonnes, analysts and traders said on Wednesday, well below the 2 million to 3 million tonnes Beijing needs to be able to contain any surge in domestic prices.

"China has already bought a lot of cotton, so any large purchases are unlikely since 70 percent of US new crop has already been booked," said Dong Shuangwei, a senior analyst with Capital Futures.

"More reserves would strengthen Beijing's ability to control prices and ensure supplies in the future, but I think it would be very cautious about big purchases since downstream demand is so weak," he said, adding that a price below $1 a pound (lb) could be seen as attractive.

With an annual output ranging between 6 million and 7.5 million tonnes, China is the world's top producer of cotton, but a strong local textile industry also makes it the world's top consumer and importer of the fibre.

This year, however, the harvest is expected to be plentiful, while demand from the textile sector is seen slowing as the prospects of a global recession hurts China's exports, mainly to the United States and Europe.

An increase in imports would benefit China's largest suppliers: the United States and Australia. Cotton exports for both nations have increased by 60 percent since 2010, largely due to Chinese demand.

China's demand for cotton was highlighted last week when the US Department of Agriculture said in a weekly report that it had bought 996,100 bales of cotton -- its largest purchase of US cotton in eight years.

The deal was timely and opportunistic. Spot cotton on ICE futures on the US had fallen as much as 10 percent from end-August to a three-month low of 95.96 cents per lb on Nov. 8.

STOCK UP FOR RAINY DAY

In recent years, the amount of cotton consumed by Chinese spinning mills have far exceeded its harvest. As a result, Chinese cotton stocks have fallen and imports have jumped -- causing global supplies to tighten.

As in other countries, many farmers in China are choosing to plant more profitable grains rather than cotton, exacerbating the supply squeeze.

Lu Yun, an analyst with commodities consultancy firm Shanghai JCI, reckons China's cotton acreage could fall 10 percent next year, as roller-coaster prices have added to farmers' scepticism. Domestic cotton prices plunged 40 percent from February's record high.

A potentially smaller harvest means Beijing must ensure it has enough reserves to offset any more price swings, said Liu Shijun, an analyst with Jingyi Futures, adding that the government may aim to stockpile around 3 million tonnes.

Sources said China has already imported 200,000-300,000 tonnes of cotton in calendar 2011 to refill its reserves.

Cotton imports in the first 10 months of this year totalled 2.20 million tonnes, down 2.4 percent on the year, according to the report published on www.cncotton.com, a website operated by the China National Cotton Reserves Corp.

As with other agricultural commodities, China's appetite hinges on global prices remaining attractive, and domestic supply and demand.

State stockpiler CNCRC said on Oct. 27 that it has bought 65,960 tonnes of cotton from local farmers at an average price of 19,493 yuan ($3,071) a tonne. By Tuesday, the government had bought 506,840 tonnes of the crop from farmers.

JCI's Lu said that based on the scale of Beijing's local buying programme, launched in part to support its cotton farmers, CNCRC can easily stock one million tonnes of cotton from domestic supplies before the program ends in March.

But should overseas prices fall below $1 again, China could still import 700,000-800,000 tonnes of cotton in 2011/2012 crop year to beef up its reserves, said Wang Qianjin, a senior analyst with industry website www.webtextiles.com.

Benchmark New York cotton for December delivery closed at $1.0266 a pound, while prices at the Zhengzhou exchange hovered at 20,410 yuan a tonne, or $1.45 a lb on Wednesday.