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Low china demand sinks cotton

Low china demand sinks cotton Source: www.chinatexnet.com
Date: 05-06-2013
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As the world's biggest consumer of the fiber, China played a supporting role in the cotton market last year, buying bales and putting them into storage. Its purchases of U.S. cotton have helped boost prices 13% during the current season, which will end on July 31.
 
But next season, China is expected to import 34% less cotton, and Chinese domestic use of the fiber should be flat, according to the Agriculture Department. This stagnant consumption will likely weigh on futures prices through the end of the year. "We're pretty bearish and…waning imports by China [are] the basis of our bearishness," says Jordan Lea, co-owner of Eastern Trading, a cotton merchant in Greenville, S.C. "Even flat consumption [in China] is all it takes to put some pressure on the market."
 
The benchmark cotton contract on the ICE Futures U.S. exchange shed 7.2% during May, due in large part to lackluster exports, settling at 79.36 cents a pound on Friday, a 4½-month low.
 
Lea expects prices to continue to slide to the low 70-cent area in 2013's second half. "It's hard to imagine how China could work off an ending-stocks number in excess of 100%" of use, he observes.
 
CHINA HAS BEEN STOCKPILING the fiber since late 2011, after prices spiked to a post-U.S. Civil War high of $2.27 a pound. It will keep buying cotton in the season starting Aug. 1, but at a slower pace. The procurement program will leave the country in possession of 63%—58.2 million 480-pound bales—of the world's cotton stocks at the end of the coming season, the Agriculture Department estimates. Meanwhile, Chinese domestic use is forecast at just 36 million bales.
 
"More and more, the world crop is going to be locked up inside of China," which means that what Beijing does with those stocks is all the more important, comments Sharon Johnson, a senior cotton specialist at Knight Futures in Atlanta.
 
With its warehouses brimming, China National Cotton Reserves Corp. began daily auctions on Jan. 14, but Chinese mills have taken less than a third of the cotton offered through the end of May.
 
China's "got so much slack, as far as demand goes, with supplies on hand," says John Payne, a market strategist at Daniels Trading in Chicago. "They are going to simply buy less and stockpile less," which is bearish for prices. Payne expects futures to fall to 72 cents a pound in the second half of the year, as China's import demand fades. China has "no reason to buy into a rally, and if they're not buying, the market's not going to rally," he adds.
 
The stronger dollar, which has been trading near three-year highs, is also cutting into U.S. cotton sales because it makes purchasing the fiber more expensive for buyers abroad. America sells about 75% of its cotton overseas, making it the world's No. 1 exporter of the fiber. To be sure, dry weather in West Texas, the nation's largest growing region, and a subpar monsoon in No. 2 producer India could provide near-term support for prices…until the new U.S. crop begins to arrive in October and is met by softer demand from China.
 
China is "like a bowling ball in the middle of a bed," says Gary Raines, chief fiber and textile economist at INTL FCStone. "Everything kind of orbits the bowling ball."
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