ICAC: Negative Impact Expected from Chinese Policy and Polyester
WASHINGTON — April 1, 2014 — The uncertainty on how China will handle its large reserves next season and the significant gap between polyester and cotton prices does not bode well for cotton consumption in China and, by extension, countries that have heavily exported cotton to China in recent seasons.
In 2013/14, the Cotlook A Index has averaged 90 cents per pound while polyester in China averaged 73. However, in March 2014, the price of polyester in China dropped below 70 cents per pound, to about 66 cents, while the Cotlook A Index has averaged about 97 cents. Given the substantial cost difference, cotton’s share of the market is expected to continue its decline this season. However, consumption in absolute terms is expected to rise by 1% to 23.6 million tons in 2013/14 and by 3% to 24.3 million tons in 2014/15 as a result of the recovery of the world economy and growth in world population. Although cotton mill use in China is expected to decline this season to 7.9 million tons from 8.3 million tons in 2012/13, it will still be the largest consumer in 2013/14.
Earlier this year, the Chinese government announced that it would end its reserve policy, and test a target price policy in Xinjiang. In 2013/14, the government bought approximately 6.3 million tons of cotton, 42% of which came from Xinjiang, and sold about 930,000 tons. However, sales are expected to increase as Beijing Cotlook reports that the Chinese government will lower the starting auction price from 18,000 Yuan per ton to 17250 yuan and will allow spinners to purchase one bale of import reserve for every 3 bales purchased from Xinjiang warehouses. The Secretariat does not anticipate that reserve sales in 2013/14 will exceed 3.7 million tons, which is the volume of sales made in 2012/13. The Secretariat estimates that the Chinese government currently holds 12.8 million tons in the reserve. Total ending stocks for China (including private sector holdings) are expected to be 11.5 million in 2013/14, which account for 58% of world ending stocks.
Posted April 8, 2014