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China Cotton Demand to Recover, Lifting Prices, Weiqiao Says

Updated: 2012-3-31 Source: Bloomberg

Cotton demand in China, the largest user, may rebound this year, increasing imports and stemming a decline in prices, said Zhang Hongxia, president of Hong Kong- listed Weiqiao Textile Co.

Consumption may rise to 9.58 million metric tons this year from an estimated 9 million tons in 2011 amid a recovery in the textile industry, Zhang said in an interview on March 26. Shandong-based Weiqiao is China¡¯s biggest cotton-textile manufacturer, according to its website.

China, which uses about 40 percent of the world¡¯s cotton, will import 18.5 million bales this season, the most in six years and 54 percent more than a year earlier, according to a U.S. Department of Agriculture estimate on March 9. Cotton prices in New York have slumped 57 percent from a record in March 2011 amid record global crops and prospects for slowing global economic growth.

¡°Things are looking to pick up in the industry at the beginning of this year, as far as we can see we are running at full capacity in the first two months and our end-product cotton yarn inventory has been reduced by 12 percent during the period,¡± Zhang said. ¡°Cotton demand is set to rise this year and the price gap between foreign and local cotton will narrow steadily.¡±

Imports have gained 64 percent to 942,400 tons in the first two months, according to customs data. Shipments to China are rising as the government diverts domestic supplies to state reserves that may represent 25 percent of global stockpiles by July, according to International Cotton Advisory Committee in Washington.

¡®Too Pessimistic¡¯

¡°Some investors are too pessimistic about the Chinese textile industry,¡± Kuang Bo, analyst at Yong An Futures Co., said by phone from Shanghai yesterday. ¡°Overall cotton demand will recover this year as the domestic consumption will more than make up for the loss in the export market.¡±

When spring re-stocking begins and seasonal demand picks up, there will be a recovery in textiles, Kuang said.

Cotton for September delivery on the Zhengzhou Commodity Exchange gained 0.2 percent to 21,265 yuan ($3,372) a ton today. Prices have fallen 39 percent since reaching a record 34,870 yuan in February 2011. In New York, cotton futures for May delivery were little changed at 94 cents a pound. The commodity posted the sixth straight gain, the longest rally since early January, on speculation demand will remain robust for U.S. supplies.

An expected oversupply in the global market and slowing economic growth have lead some analysts to predict continued declines in prices and demand.

Global Surplus

¡°The cotton market in my opinion doesn¡¯t have much potential for profit for investors this year due to the overall weakness in the textile industry,¡± Lou Zhi, general manager at Dalian-based hedge fund Hunter Capital Co., said in Beijing yesterday. ¡°There haven¡¯t been many signals of a strong recovery and the prices are most likely to stay range-bound.¡±

Farmers will reap 123.6 million 480-pound bales in the 12 months ending in July, exceeding demand by 15 million bales and expanding stockpiles by 32 percent to the second-biggest on record, the U.S. government estimates. Global inventories as of July 31, 2013, will climb 11 percent from a year earlier, the International Cotton Advisory Committee said on March 1. The surplus is equivalent to 60 percent of global mill use, the largest stocks-to-use ratio since the late 1990s, the Washington-based group said.

The appreciating Chinese currency and rising costs including labor and transportation have eroded China¡¯s competitiveness in the low-end textile market compared with India and Bangladesh, Weiqiao (2698)¡¯s Zhang said. ¡°We are trying to boost sales in the domestic market and also upgrade our products to better compete in the high-end market.¡±

Profit Tumbles

Weiqiao¡¯s net profit tumbled 85 percent last year on declining value of exports and low demand overseas, leading to higher inventory levels, according to a company statement on March 26. The company¡¯s shares have dropped 24 percent to HK$3.85 from a seven-month high on March 6. Weiqiao produced 61,800 tons of cotton yarn and almost 1.2 billion meters of raw cloth in 2011, Zhang said.

China¡¯s domestic cotton prices haven¡¯t fallen as much as those in overseas markets because the government purchased more than 3 million tons of local crops at 19,800 yuan a ton to protect farmers, said Dong Shuzhi, trader at PKU Founder Commodities Co.

¡°The government issued a quota of about 2 million tons at the beginning of the year, of which some still remains unused,¡± Zhang said. ¡°There¡¯s also speculation that China will issue another quota of 1 million tons in April, which will boost foreign cotton prices when Chinese users start importing.¡±