The Hindu Business Line : Stocks may rein in cotton prices

DESPITE world production and consumption of cotton in 2005-06 forecast to remain in balance, there is widespread expectation that world cotton prices could climb by a fourth from the current levels. But, record opening stocks and comfortable supplies during the year may rein-in a runaway price rise.

World cotton mill use next year is expected to rise to 23.7 million tonnes (up from 23.24 mt in the current year) spurred by consumption increases in China, India and Pakistan.

Cotton output may, however, decline to 23.4 mt, from the record 26.13 mt of the current year, as per latest assessment of the Washington-based International Cotton Advisory Committee (ICAC). Despite anticipated steep fall in output, 2005-06 crop size, if realised, would still be the second largest.

China is seen as the driving force behind world mill use with consumption projected to reach 8.6 mt, up 5 per cent. Cotton output in China is projected to trail consumption by as much as 2.8 million tonnes in 2005-06, necessitating record imports.

Cotlook-A Index is expected to average 68 cents a pound in 2005-06, up from this year's average of 53 cents/lb, as a result of projected skyrocketing net imports by China. The structural imbalance between domestic production and consumption in China is expected to continue supporting cotton prices during the next season, according to ICAC.

For one, the opening stocks of the next season are projected at a new high of 10.53 mt, while the ending stocks too are forecast at a near record 10.2 mt.

Pressure of such high level of inventory, notwithstanding a big jump in imports caused mainly by China, may not let world cotton market firm up to the extent being made out, according to analysts.

Cotton production in India can spring a surprise. Whether the country can repeat its phenomenal performance of 2004-05 once again, remains to be seen.

Anything above 200 lakh bales in 2005-06 would open up export opportunities for India, given the emerging upside for world cotton prices.

Given its low cost production, China is the main beneficiary of the abolition of quotas on textile and apparel trade among WTO members since beginning of this year. Safeguard petitions to limit the growth imports from China to developed countries are multiplying in numerous textile categories, as allowed until 2008 under WTO rules.

An appreciation of the Chinese currency Yuan, if it occurs, would benefit China's competitors on the export market, without stemming the flows into import markets, ICAC observed.

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