Clearing Up China’s Cloudy Forecasts
January 26, 2009 China’s rapid growth and development in the recent past has made the country the most dominant force in the cotton industry, with mills that reportedly consume over 40% of the world’s cotton, growing consumer demand for finished products, and improving production. Because of that level of influence, the country has come to dictate the international market, as global demand for cotton (and consequently, cotton’s price) is to a large extent subject to China’s mills.
Yet for all its importance, forecasts of Chinese production, consumption and demand are dangerously uncertain. In an effort to examine the numbers more closely and equip the industry with better tools to gauge China’s market, a recent report from USDA’s Economic Research Service (ERS) explored new methods for estimating cotton consumption in the country which is based on several factors, including textile import and export data, household cotton consumption, fiber content of goods produced, and gross domestic product (GDP) and per capita expenditures.
This information provides another tool that can paired with the traditional method of using yarn production data from China’s National Bureau of Statistics (NBS), which in the past few years have proven to be limited in its predictive ability.
Multiple Models
Stephen MacDonald, senior economist at ERS and the author of the report, analyzed China’s trade in terms of cotton content contained in exported products and the cotton content of products consumed domestically. Other models were used as well, including basing domestic textile consumption on real consumer expenditures on clothing (CEC) – which is problematic, as it is also based on NBS figures – and by using a model that estimates cotton end-use as implied by the country’s GDP and per capita incomes.
The end result of the different analyses confirmed that historical estimates of Chinese mill consumption were reasonable, but that current forecasts are likely conservative (by as much as 15 million bales, see chart). They also suggest that there may be problems with the official estimates of China’s cotton production, which all add up to a dizzying state for the cotton industry. In the report, MacDonald notes that “in the not too distant future, China’s demand for cotton imports could differ by millions of bales from the consensus forecasts of only a few months earlier,” and adds that the possibility of the resulting price shock “imposes costs on the world’s cotton sector, including China.”
Still Uncertain
So, will the new data models being explored allow the cotton industry to zero in on China’s production and consumption, and lead to a stabilized cotton price situation?
“I wish I could be more reassuring,” MacDonald told Cotton International. “There seems to be some consensus that China does produce more cotton than we once thought, which is an important step towards resolving the uncertainty.”
He adds that USDA’s new methodology can help pinpoint the amount of change in China’s mill consumption, but that many questions still exist regarding the base level from which those changes are originating.
In addition, other wrinkles make demand estimates even more difficult – in particular the mysterious state of China’s government-held cotton stocks, which are still kept shrouded in secrecy, a carryover from the days when cotton stocks were officially a state secret.
“China has changed a great deal in a very short time. Hopefully, as China’s transformation matures and deepens, the resources that permit a richer and more accurate understanding of things like cotton consumption will become available to the world economy,” MacDonald explains.
“Uncertainty about China is not new, but hopefully the next few years will permit a reduction of this uncertainty.”
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