Dreyfus: China’s High Cotton Demand May Weaken on High Costs
July 12, 2011 Bloomberg
Cotton demand from China, the world’s biggest consumer, may weaken as high costs encourage consumers to switch to cheaper synthetic fibers, said Chen Tao, chairman of Louis Dreyfus (Beijing) Commodities Trading Company Ltd.
The stockpiling policies by China may keep cotton at about 20,000 yuan ($3,093) a metric ton, Chen said in an interview at a conference in Dalian. Prices at this level may make cotton a “luxury,” not something cheap and affordable to everyone, Chen said. “It’s like when juice is too expensive, people drink tea, and when tea gets expensive, they’ll have to do with just water,” he said.
Cotton in Zhengzhou has gained 37 percent in the past year, rising to a record 34,870 yuan in February. State reserves will buy domestic cotton from Sept. 1 at 19,800 yuan per ton to support prices, the National Development and Reform Commission said in March.
If the policy is successfully carried out, it may effectively support market prices of the natural fiber at this level, Chen said. Cotton demand may also weaken because Chinese yarn producers “rapidly” expanded output as profits rose after demand for textiles recovered from the 2008 financial crisis, Chen said. “So many textile producers went shopping for machines at the time, supplies ran out,” he said.
Still, prices in China have fallen 35 percent to 22,660 yuan a ton from a record in February on concern a slowdown in economic growth in China may damp demand and as crops in India expand. Imports fell 27 percent in May, according to customs data.
Cotton futures for December delivery gained 0.9 percent to $1.1657 a pound on ICE Futures U.S. in New York. Yesterday, the price touched $1.1502, the lowest level since Nov. 30. In June, the fiber dropped 12 percent, the third straight decline, as demand ebbed in China.
Excessive investment in production capacity and slowing demand this year are forcing producers to cut output or face bankruptcy, eroding demand for cotton, Chen said.
The current environment “doesn’t bode well for demand for cotton,” Chen said. If synthetic fiber becomes a permanent replacement for cotton, “China may no longer have much of a cotton shortage in a few years,” Chen said.
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