China Seeks To Stabilize The Market, Not Depress It.
August 22, 2013 Few things in recent history have had a greater influence on the cotton market than the behavior of the China National Cotton Reserves Corp. (CNCRC). Although cotton prices plummeted from their historical 2011 peaks – causing a rash of contract defaults that have shaken the cotton trade to its foundations – they likely would have fallen much lower if not for the massive buying spree conducted by the CNCRC.
From Dec. 28, 2012-Jan. 12, 2013, the government published four notices that provide a glimpse of China’s policy in 2013. Below is a summary of those changes and the impact they are expected to have (a chart listing the changes in greater detail can be found on page 15).
• The price for basis-grade cotton was raised 500 yuan/ton to 19,000 yuan/ton.
• Reserve cotton produced before 2011/12 will be reinspected, but won’t be re-weighed. All imported cotton, as well as domestic cotton produced in 2008/09, will be delivered based on its net weight. This cotton is very likely to be downgraded because it has been in reserve warehouses for 4 to 7 years, so the actual price will be lower.
• In 2013, CNCRC plans to sell domestic cotton from 2008/09 and 2011/12, new reserve cotton from 2012/13, and all cotton imported before 2011.
• There are two countdowns (the time frame between winning bids) rather than three, and the countdown time is shortened. The higher weight of each bundle (200 tons each) is expected to accelerate the auction’s progress.
• The load-out charge is raised 50%, from 30 yuan/ton to 45 yuan/ton.
• The government has increased the reward to those who report people who try to cheat the system by 50%, from 100,000 yuan to 150,000 yuan.
How the Market Should React
Spot price is expected to hover around 19,000 yuan/ton for the foreseeable future. The starting price is fixed at 19,000 yuan/ton – slightly lower than spot price, which can help mills replenish their material stocks.
The actual listing price may be lower at first, but will rise. According to principle of “first-in, first-out,” it is expected that old reserve cotton produced in and before 2011 will be released first. The real transaction price will be lower than 19,000 yuan/ton because the grade and other quality indicators of the old cotton will be revised downward after re-inspection. But CNCRC will add new crop cotton to the selling list as time goes by, at which time the listing price will rise.
The real buying volume and price will reflect mills’ affordability and will act as guidance for the spot market.
Prior to the issuance of the sliding duty quotas, mills likely will buy mid-to-high quality cotton through the reserve selling program. According to the 2013 quota policy, 894,000 tons of tariff-rate quota (TRQ) cotton has been released in January, most of which are quotas for processing trades. However, the liquidity and utilization of this type of quotas is relatively lower. The Chinese government likely will release quotas on the basis of mills’ buying quantities because some textile mills have received the notice of releasing reserve cotton and quotas at the ratio of 3:1 (in other words, mills that buy 3 tons of reserve cotton can get quotas to buy 1 ton of imported cotton).
According to the ICE price level, it’s worthwhile to pay 40% duties for imported cotton that is offered at 85 cents/lb or less. At press time, most Indian cotton (700,000 tons are available for Chinese market in 2013, substantially down from previous year) is offered around this level. There are no advantages to paying 40% duties for cotton offered at 90 cents/lb or more.
In the short term, if mills want to get high-quality cotton, they should take part in reserve selling. No one knows when the sliding duty quotas will be released and as a result, the price of mid-high quality cotton remains firm.
The policy changes discussed in this article indicate that the Chinese government wants to ensure its cotton supply and stabilize the cotton market without depressing it. Spot cotton prices will probably remain about 19,000 yuan/ton, and the price of high-grade cotton will grow firmer in coming months.
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