Chinese mills may suffer from higher cotton prices next year

Chinese cotton mills may suffer from higher cotton prices next year as the government continues to buy cotton from the market and planting acreage shrinks, industry participants said on Monday.

The adjustment of cotton import tariff for sliding-tariff quotas may also raise costs for mills which need the high-quality crop, they said.

"We have no choice but to (accept the higher prices)," said a deputy chief with a top 10 Chinese textile group, adding that his company was still consuming the cotton which was purchased when prices were high.

Cotton prices have tumbled since earlier this year, with rolling three month cotton futures traded on the Zhengzhou Commodity Exchange falling more than 40 percent since mid-February.

Chinese mills do not have much high-quality cotton available for use as the government has been actively buying the crop from farmers to support local prices.

The government bought 1.62 million tonnes of cotton from farmers as of Friday, while analysts expected it to purchase a total of 2.5 million to 3 million tonnes of the crop, 35 percent-42 percent of 2011's output estimated by the National Development and Reform Commission.

The cotton purchase price was 19,800 yuan ($3,100) per tonne, and some analysts said the government was unlikely to sell them without profits of between 2,000-3,000 yuan per tonne.

"Local cotton prices may go higher if the government doesn't issue sliding-tariff import quota soon and mills may start to compete for the local crop (early next year)," said Guo Weile, an analyst with industry website www.tteb.com.

China issues cotton import quotas of 894,000 tonnes each year, subject to an import tariff of 1 percent.

Besides that, it also issues sliding-tariff quotas for an uncertain volume of the crop, which is subject to tariffs ranging from 5 percent to 40 percent.

Last week, the government adjusted the way of calculation for the sliding-tariff in 2012.

Under the new calculation, for New York cotton price quotes of below 50 cents per lb or above 100 cents per lb, the import costs are unchanged.

But if the quotes are between 50-100 cents per lb, the import costs could rise by as much as 512 yuan per tonne, according to calculations from industry websites.

 

With the new way of calculation, the government "wants to reduce the attack from low global cotton prices on local prices," said Liu Wei, an analyst with Guohai Liangshi Futures Co Ltd.

Beijing Cotton Outlook, a subsidiary of UK-based Cotlook Ltd, forecast China's cotton planting area to decline 9 percent in 2012 from this year due to falling cotton prices.

Dwindling textile demand and higher growing costs also weighed on cotton farmers' interests, dampening their willingness to grow the crop, analysts said.