China’s move to release reserve stocks unnerves cotton trade

Global cotton prices could come under further pressure this year as China plans to release some cotton from its state reserves this year in a bid to reduce its bulging stockpile.

Participants, mainly traders, at an industry conference here expressed concerned over the move since Beijing is expected to offer its old crop fibre at a discount to attract buyers.

Plans for price stability However, Yin Jian, Deputy Director of the economy and trade division of National Development and Reform Commission said that care would be taken not to disrupt the market.

Maintaining price stability remains a priority, he said on Thursday.

China will issue detailed plans in the next 10 days, Yin told the conference. He gave no further details on price or the timing the release. Market rumours have swirled for weeks that Beijing is preparing to release some of its stocks from reserves, exacerbating sluggish demand for cotton as mills keep inventory to a minimum ahead of the anticipated auctions.

“We will not pressure market prices,” Yin told Reuters, adding that conditions for the release were stable market prices and a stable market.

He told the conference that it would take several years for the market to digest the state-held cotton reserves, which are currently estimated at around 10 million tonnes, accounting for more than 40 per cent of world stocks.

Prices under pressure Global cotton prices are already under pressure from weak demand and large stocks. The US Department of Agriculture expects global stocks to hit 24 million tonnes at the end of 2014-15, the second highest on record.

While Beijing is under pressure to release stocks to recover part of its stockpiling costs, it may struggle to sell the fibre. Much of it is widely believed to be of poor quality and would have to be sold at a discount.

But offering too much discounted cotton could risk pushing market prices down further, and lead to increased costs for the government under its subsidy scheme to farmers.

China currently sets a target price for cotton and pays farmers the difference between the target price and the average market price.

Yin said China’s northwestern region of Xinjiang would continue to be the country's main cotton producing area, while farmers in other regions are expected to reduce their cotton acreage.

The government would also encourage more textile factories to move to Xinjiang and cut down on the volumes being shipped to other regions, he added.

Output declines On the other hand, China’s cotton output is projected at 5.86 million tonnes in the 2015-16 marketing year, said Gao Fang, the director of the China Cotton Association.

It represents a decline of 9.8 per cent compared with 2014-15, according to the association’s data.

It is slightly lower than the latest estimate from the US Department of Agriculture, which put output for the coming season at 27 million bales or 5.88 million tonnes.

Output in China, the world’s second biggest producer after India, is widely expected to drop after China overhauled its support policy for growers in 2014.

COMMENT NOW