Cotton’s great price unraveling continues

China imported 56,000 tonnes of cotton in February, down 65% year-on-year. Demand from China is slumping due to sluggish economic growth and increased competition from polyester. In fact China is expected to be overtaken by Bangladesh as the world’s top cotton importer in 2015-16. The US Department of Agriculture has forecast Chinese cotton demand, in the year to July 2016 at just 1.01 Mt, the lowest imports in twelve years.

Cotton futures prices tend to peak in March before trending down through the summer. However this year cotton prices are already down 8% at just over 58 cents per lb. Prices have fallen on concerns that China will release cotton from its stockpile (thought to be in the region of 11 Mt, equivalent to ~60% of global stocks) on to the market. An announcement is thought to be due by the end of March, with details like the price and the size of the sell still unknown. Cotton prices have also declined due to the fall in crude prices (energy accounts for around 40% of the cost of producing cotton and competes with polyester in textiles).

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China can just sit on cotton, waiting to sell at a higher price. But that’s an expensive and risky game and likely to prove a bad bet. Storage costs money, and beyond that, although cotton may not be as perishable as say, corn, it does become less desirable over time. Even if China does open up the doors to its cotton warehouse, there are no guarantees that anyone will buy whats inside.

China has lost its place as top cotton importer, but a much larger slip down the league table could be in order. Barclay’s predicts that China may stop importing cotton altogether by 2018, becoming a net exporter instead as its textile industry shrinks amid foreign competition and cheap polyester.

Like many policies introduced by the Chinese in the name of resource security, their cotton program is likely to prove self defeating too.

Related article: Cotton prices: The top 10 most important drivers


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