What is in this article?:
• China’s policies have driven world cotton market developments in 2012/13 and will continue to do so for the foreseeable future.
Imports make big impact
With a large proportion of domestic supply isolated from the market due to the reserve policy, China’s impact on the world market is transmitted mainly via imports. Import access during 2012/13 has been constrained as no sliding scale tariff rate quotas (TRQs) have been issued so far this season.
This has limited imports to the following categories:
• unexpired TRQ licenses carried over from 2011/12;
• the WTO TRQ licenses of approximately 4.0 million bales, issued at the beginning of the calendar year;
• imports by the state reserve; or
• imports paying the 40-percent out-of-quota duty rate.
Imports are forecast at 14.0 million bales in 2012/13, despite quota restrictions and the smallest gap between consumption and production since 1998/99. China’s mills have taken maximum advantage of the 1-percent duty WTO TRQ and the carryover sliding scale TRQ, as imports in these categories are priced significantly below domestically available cotton.
Imports during August-December 2012 totaled 9.7 million bales, nearly 70 percent of the projected total. Imports through December included a significant quantity brought in under the 40-percent out- of-quota duty rate, reflecting a severe shortage of domestic cotton to meet mill requirements. In addition, foreign cotton purchased directly by the state reserve has also supported import volumes.
Imports for the balance of the 2012/13 season will depend upon both the government’s policies regarding imports and the release of cotton from the state reserve. It seems unlikely that much discretionary sliding scale quota will be released before the end of the marketing year, since this would interfere with sales of government-owned stocks.
The current reserve sale price is 19,000 RMB/ton ($1.37/lb.), 7 percent below the support price. At an A-index price above 86 cents per pound, it will be more advantageous for China’s mills to purchase reserve cotton than to pay an out-of-quota duty of 40 percent. The A-index has averaged just under 90 cents per pound during the first half of February.
China’s 2012/13 ending stocks are forecast at a record 42.6 million bales, equivalent to 120 percent of offtake and accounting for just over half of world stocks.
World cotton consumption is expected to increase by 3 percent in 2012/13. Relatively good global economic growth has resulted in stronger textile demand while lower and less volatile cotton prices have supported a slight recovery in cotton’s fiber share.
The sharp decline in China’s consumption is more than offset by a 9-percent increase in countries outside of China. Particularly strong consumption growth is expected in east and southeast Asia, supported by record exports of cotton yarn to China, notably from Pakistan, India, and Vietnam.
While world trade is forecast down 12 percent from last season’s record level, the large fall in imports by China masks strong demand elsewhere. Imports in the rest of the world are forecast to increase by more than 30 percent.
This growth in import demand is fueled by consumption growth in the non-producing Asian markets and smaller increases in major producer-importers, such as Pakistan and Turkey.
Most of the decline in exports is being absorbed by a 60-percent decrease in India’s shipments to 4.5 million bales. U.S. exports are forecast up on a larger crop, accounting for 31 percent of world trade. Exports from Brazil and Australia, while still at historically high levels on back-to-back record crops, are both down slightly.