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Chinese economic slowdown to hurt cotton

Chinese economic slowdown to hurt cotton Source: www.bloomberg.com
Date: 22-08-2012
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Cotton consumption in China—the world’s largest user—may shrink 11 percent this year as a deteriorating economy hurts demand and causes a buildup in commodities, according to Weiqiao Textile Co.

“The Chinese economy is only at the beginning of a harsh winter,” Zhang Hongxia, chairman of China’s largest cotton-textile maker, said in an interview in Hong Kong on August 20. “China now is facing a situation where everything from coal to steel inventories are piling up.”

Zhang’s outlook runs counter to forecasts from banks, such as Goldman Sachs Group Inc., that forecast a second-half rebound as the government expands stimulus. China’s economy grew at the slowest pace in three years in the second quarter as Europe’s debt crisis hurt exports and a government drive to cool consumer and property prices damped domestic demand.

“The slowdown in China is due to overall industrial overcapacity accumulated in recent years,” said Lou Zhi, head of the trading department at Hunter Capital Ltd., a Dalian-based commodity hedge fund. “Overseas demand is unlikely to revive soon as the European debt crisis looks set to drag on. Despite a recovery in the US, growth there seems anemic.”

Cotton usage may drop to 8 million metric tons this year, compared with consumption of about 9 million tons in 2011, according to Zhang, who had forecast in March that 2012 demand may increase to as much as 9.5 million tons. China accounts for about 40 percent of global cotton consumption.

Cotton traded at 76.57 cents a pound on ICE Futures US at 12:51 p.m. in Shanghai after most-active prices fell 28 percent over the past year.

Weiqiao shares, trading at HK$2.78, have lost 33 percent in the past 12 months as the benchmark Hang Seng Index gained 2.3 percent.

Commodities as tracked by the Standard and Poor’s GSCI Spot Index rose 4.6 percent in the past year, and rallied more than 20 percent from the year’s low on June 21.

China’s export growth collapsed in July and industrial output fell short of projections, according to separate reports this month, after data showed the second-largest economy grew 7.6 percent between April and June.

Premier Wen Jiabao said last week that easing inflation allowed more room to adjust monetary policy. The country has cut interest rates twice since June and the reserve requirement ratio three times since November.

“My view might be in contrast to what many economists out there are saying,” said Zhang, daughter of Zhang Shiping, whose family hold 744.94 million shares in Weiqiao, according to data compiled by Bloomberg. There may be a so-called turning point for the economy if the government introduces “very good” policies later this year, she said, without elaborating.

Goldman Sachs economists including Hong Kong-based Cui Li said in an August 2 report on China’s economy that “we expect growth to accelerate in the rest of the year and 2013 as supportive policies are gradually rolled out and implemented.” The bank forecast a full-year expansion of 7.9 percent for 2012, down from an earlier estimate of 8.1 percent.

Economic growth may accelerate to 7.9 percent in the third quarter and 8.3 percent in the final three months, according to the median forecasts in a Bloomberg survey of 21 economists taken from August 14 to 21. The country is the world’s largest consumer of base metals and second-largest crude user.

Coal inventories at Qinhuangdao port rose to 9.33 million tons on June 17, the highest since 2008, data from the China Coal Transport and Distribution Association showed. Stockpiles were at 6.69 million tons as of August 19. While steel-product stockpiles at the nation’s 26 major markets have dropped for five months as the end of July, they’re still 19 percent higher this year, according to the China Iron and Steel Association.
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