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Ft:liverpool’s legacy strengthens cotton trade

Ft:liverpool’s legacy strengthens cotton trade Source:
Date: 09-04-2012
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It is exactly a century since Liverpool’s cotton imports hit a record and its role at the centre of the world trade began to diminish.

Yet although no raw cotton is handled today by its docks, Lancashire’s textile industry having collapsed, the city remains an important hub and is home to the body that sets the “Liverpool rules” under which much of the commodity is traded.

 “Liverpool has a huge legacy and expertise in the international cotton trade, built over two centuries,” says Nick Earlam, chairman of Plexus, the last independently owned broker in the city.

“It basically had a large part to play in developing cotton industries in countries where the UK had colonies, such as Uganda, Tanzania, India and Nigeria. It has built a global marketplace and, if you are from Liverpool and in the cotton business, you are serious.”

Weil Brothers & Stern, the Anglo-US broker formed by merger in 1991, has invested in a new headquarters, Cotton Wharf, on the banks of the Mersey in Birkenhead. Its US arm sources American and Chinese cotton, while Birkenhead is the centre for trade elsewhere.

Cargill, the US commodities trader, operates a similar model. It has a significant operation in Liverpool after buying Ralli Brothers & Coney in 1981. Ralli buys cotton from Africa, Europe and Asia, while Hohenberg Brothers, a big brand bought by Cargill in Memphis, deals with the Americas. The two were renamed Cargill Cotton in 2002.

Paul Kinney, director of Cargill Cotton in Liverpool, says: “Due to timezone differences, it is almost impossible to manage a truly global cotton trading company from one head office. It is essential to have two management and trading centres, and Liverpool is near perfect for all origins outside of the Americas.”

Even though consumption of cotton is shifting from a declining European market to growing markets in Asia, Europe remains a convenient base for the trade, says Mr Kinney, especially given that the price is determined on the New York futures market.

According to Mr Kinney, Liverpool has retained its place thanks to its international outlook.

When the cotton spinning industry in Lancashire collapsed rapidly in the 1970s as mills in Asia undercut prices, the traders adapted. Mr Kinney points to the 2004 decision to rename the Liverpool Cotton Association the International Cotton Association and to elect non-British presidents.

Kai Hughes, secretary-general of the association, founded in 1841, says about 70 per cent of the world’s raw cotton is traded under ICA rules, and it has more than 400 members, including some of the world’s largest companies.

It is based in Exchange Flags, overlooking “Cotton Corner” where traders first gathered in the early 1800s.

The ICA was busier than ever in 2011, with a record number of arbitrations, because of price volatility. Many mills and farmers reneged on contracts.

Mr Hughes says Liverpool is likely to remain the association’s home because it is “neutral ground”. The UK has no significant stake in the industry and the UK courts are seen as among the most reliable.

Nevertheless, the ICA board is looking at measures to build confidence in the market. It could turn to credit insurers or even introduce credit ratings, obliging mills and agents to employ agencies such as Moody’s and Standard & Poor’s to rate their likelihood of default.

Mr Earlam, whose broker survived the 2008 crisis – when speculation drove prices to record highs before they collapsed – says such a move would be unnecessary and hard to implement.

“A lot of these guys need to look carefully at how they have been selling to people. They have not looked at the risks of the customer. Selling on New York futures to Bangladesh is like subprime,” he says.

The failure of many businesses in 2008 has helped Plexus, which has amalgamated some historic Liverpool family businesses. Mr Earlam started in the trade in 1977 and founded Plexus in 2000. He and his wife own the majority of it.

“From a market point of view there is less competition, and from a business point of view it forced us to focus on costs and restructuring,” he says.

The business employs 40 people in Liverpool and about 3,000 in the African countries where it grows cotton. It sells seed to farmers, buys and processes their product, and sells it.

In the 2010 calendar year, Plexus made pre-tax profits of $8.1m on turnover of $400.3m, up from $180,000 and $266.6m the year before. For 2011, pre-tax profits should be $9.1m on $500m of revenue, according to Mr Earlam.

He forecasts that cotton will become a luxury item as the amount grown is restricted by land use. Plexus aims to have its entire supply sustainably sourced and traceable by 2025, so it can command higher prices.

“There is a big future in it,” Mr Earlam says.

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