China Revises Cotton Reserves Sales’ Policy

With the cotton auction now in motion over a couple of months and the continued higher price of cotton on the domestic market, China’s reserves has decided to make some changes with implementation. First, an additional 5,000 tons will be added to the daily offered amount. Second, warehouse space in major consumption markets will be increased. Third, middlemen traders who have been entrusted as agents for the textile mills will now not be allowed to take part in the daily reserve’s auction. And last, to increase the distribution of Xinjiang stocks, a transportation subsidy will be given to lots within the province that must be transported to the eastern based mills. The powers that be have made these changes in light of a much stronger than expected domestic market as prices have continued to move higher, despite the additional tonnage released on the market. To make matters worse, the logistical movement of cotton from warehouse storage to deficit areas has not proceeded as smoothly as the reserve would like. Further, warehouse space that was supposed to be guaranteed has, in some instances, not been there at all. The absence of the middlemen should help relieve prices a bit though it may make it more difficult for the mills that are still in precarious financial shape. As for the transportation subsidy, it is an absolute necessity to help the reserves move more cotton from the west to the eastern based mills as well as reduce the landed the mill price. We expect the reserves to act far more aggressively with the movement of cotton in China until harvest begins.

China's Textile Industry Gets Fresh Capital

I read with interest the press release in my mailbox announcing a joint effort by two Chinese companies establishing a new fund aimed at investing in textile companies on the mainland. Specifically, the China Eastern Silk Market and the Suzhou International Development Group will contribute a total of 500 million yuan (US$73 million) to help the development and competitiveness of SME textile mills. According to the release the fund will seek out those SME textile mills that already shown innovation during these tough times and have the capability for growth. In three years time and of course depending on the success, the fund hopes to increase to 3 billion yuan or about US$439 million as well as make the greater Shengze area in around Suzhou a center of textile R&D, price discovery and financing.

Despite the rampant over capacity and very much down market conditions, China’s battered textile industry seems to be breathing new life. Several years into the downturn, I must admit the industry even seems to be quite optimistic on its future. In particular, the vertical textile mills are keen to take advantage of the market’s correction to make moves against weaker, less capitalized competition. Commitments like the aforementioned new textile fund are proof positive China has decided to ultimately keep textiles as a pillar industry while at the same time still forcing smaller and less focused players to leave the business. While this textile fund is primarily geared towards Jiangsu based companies, it would not be difficult to imagine other funds popping up in other top textile provinces.

The Future of High Quality and Branded Cotton?

For companies thinking cotton is just cotton, the market has some surprises in store. Although the overall quality of cotton globally may be increasing, how the improvement is occurring remains surprising--long staple cotton has expanded to become the dominant type of quality cotton produced today, while at the same time these gains have translated into a decline in Pima and other extra-long staple varieties, and the traditional lower end of the market, generic upland cotton.

So what had been the middle of the market has now become more important than ever in understanding the global cotton business.
Indeed, what are the ramifications of such changes? Will cotton become cheaper or more expensive? What about supply versus demand? Will there be shortages or new market opportunities?

To help answer these and other questions, FCStone Fibers & Textiles announces a new multi-client study entitled "The Future of High Quality and Branded Cotton".

With particular focus on China, India, the U.S. and Egypt, this study will examine global supply and demand trends for the major varieties of cotton, the attitudes of buyers and sellers of cotton internationally and the implications these trends and attitudes will have on merchants, mills, and retailers throughout the entire textile supply chain.

FCStone Fibers & Textiles proposes to undertake this essential strategic study for delivery to subscribing clients by August 31st. Please click http://www.globecot.com/20090615prospectus.pdf to reserve your copy of the "The Future of High Quality and Branded Cotton". If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).

China: June Cotton Update

It is well known the Chinese government wears two hats when it comes to the greater textile industry in China. By harvest, they will be deeply concerned over prices farmers receive for their seed cotton. This usually lasts up until the end of the year and sometimes into January; depending on how short of cash farmers are before the Lunar New Year holiday. However, once the holiday is concluded the government is continually taking the temperature of the textile industry. This year, the textile industry had been seriously complaining about a lack of quality supply even after the reserves release started in late May. In fact, the industry voiced its displeasure by a lack of support for the 2008/09 grades. Therefore, June began with the China National Cotton Reserves (CNCRC) announcing a heavier release of stocks from the 2008/09 season. The reason why was simple: textile mills were not getting enough of the higher grades needed to fill export orders. We pointed this out in May’s recap as well as on my blog in several posts. Still, as June crept by it was obvious the textile mills were gaining the upper hand and supply concerns were warranted. Therefore, the rumors currently hitting the market of an additional 400,000 to 500,000 TRQ quota with a 1% processing tax to be forthcoming should really come as no surprise. Actually, it’s not officially announced yet but we all know China operates on the release of information; pays attention to the feedback; makes adjustments; and then announces the official policy. I see no difference here.