Given that China has been the world’s top producer, consumer and importer of cotton for many years, it’s shocking that the country could have gained so much more influence in the global cotton industry in just the last year or two.
But that’s undoubtedly the case in 2013:
• Global cotton prices are affected by Chinese policies more than any other factor – including economic fundamentals such as supply and demand.
• Earlier this month, USDA increased its forecast of global cotton stockpiles for 2012/13 to 81.86 million bales.
• More than half of that amount – 42.61 million bales – resides in China’s national reserve.
Overall, the amount of cotton in global stocks is at its highest point since USDA began compiling the statistic in 1966. Remove China’s supply from the equation, however, and global stocks are at 39.25 million bales, the lowest total since 1994/95.
When a country with that much influence changes policies and/or purchasing habits, the entire world feels the impact – and no part of the world feels it more than China’s neighboring countries in the region. When China outsources some of its spinning capacity, other countries see a commensurate uptick in business for their spinning mills. And when China shows a preference for importing cotton yarn rather than raw fiber, yarn merchants in countries such as India and Pakistan are there to meet the growing demand.
Cotton International interviewed top cotton and textile professionals from various sectors – trading, logistics, controlling, and spinning – to get a better understanding of the major shifts that are taking place in this increasingly important region.
High MSP Driving Shift to Synthetics
No single factor has had a greater effect on the cotton and textile trade in Southeast Asia than China’s import policies, according to Urs Riederer, president of Hong Kong-based Sunrise Resources. The minimum support price (MSP) that the Chinese government pays to farmers has been placed far above the world average, thereby forcing Chinese mills to buy unrealistically expensive local cotton. Import quotas with various tariffs helped somewhat, but many mills had no choice other than to shift to synthetic fibers or close down.
“Under the circumstances, mill consumption nose-dived from a maximum of 11 million tons to what we believe is currently an annualized consumption of 6.5 million tons,” Riederer says. “This represents about a 40% cut. It is bad news for Chinese mills but good news for mills across Asia, as a massive increase in yarn imports means better demand for yarn from the Indian sub-continent and Southeast Asia. The result is a massive shift in demographics across Asia.”
Unfortunately, Riederer sees the Chinese government’s position as an indicator that it is content with seeing a reduction in the country’s number of cotton spindles, as well as a desire to acquire massive amounts of cotton.
“We have witnessed how price disruptive this is,” Riederer says. “We are not sure if the government realizes the full extent of its policies and the dynamics they create for the rest of Asia and the world. Southeast Asian markets will increasingly become feeder markets to China for both woven and knitted yarns. So quite frankly, as China creates the market dynamics, the question should be: How do other Southeast Asian markets adjust? It creates positive vibes for mills in Southeast Asia. The reason is clear: Better demand usually leads to better prices, and we are already starting to witness this.”
The dangers, however, are also clear. If the spinning industry becomes too dependent on China, the consequences would be dire should the Chinese government decide to introduce quotas for yarn as well.
To be successful in this dynamic and rapidly changing market, merchants will need to make flexibility their primary objective. They must be able to anticipate changes and adjust to them before they occur.
“It is always a matter of trying to stay a step ahead of the curve,” Riederer explains. “It became obvious to the merchant community here and everywhere else in the world that the policies from Beijing would bring about profound and lasting changes in the demographics of cotton flows.
“The merchant community has always regarded China as a high-risk market, mostly because of sanctity of contract issues but also because of issues such as China Inspection and Quarantine (CIQ) terms, availability of quotas, etc.
“But we believe that once a level of confidence has returned to the marketplace and mills in Southeast Asia have operated profitably for a few months, the financially stronger mills will start to cover more far forward again – which is what the trade wants to see now that prices are at relative low levels and market risks can be more realistically assessed,” he concludes.
The Upside of Longer Transit Times
To gain a better understanding of how the changing market dynamics affect logistics, Cotton International turned to W. Neely Mallory III, president of the Mallory Group. He identified four major changes from the perspective of the Memphis-based company:
1 Security: U.S. Customs requirements to file Automated Export System (AES) and submit documentation 48 hours in advance of port cutoff have put more responsibility on U.S. cotton exporters and logistics companies to react quickly to sales opportunities when working with the ocean carriers.
2 Port cutoffs: In the past, U.S. exporters could move cargo to the port well in advance of vessel sailing to consolidate loads from around the Cotton Belt. Today, the delivery window is no more than five days, so they have less than a week to consolidate your multiple container shipments at the port.
3 Bolt seals: Pakistan, Bangladesh and India now require bolt seals to be affixed to the container. This is new for U.S. cotton exports and an educational process will be needed to ensure warehouses and truckers are able to comply with the mandate.
4 Global competition: As the world’s supply chains begin to approach the speed and efficiency of the U.S. supply chain, U.S. cotton exporters will feel more pressure to increase the speed of sales and execution of exports.
Scheduling and delays are concerns, as well. Almost all cotton sold to the Far East is sold on Letter of Credit (L/C) basis, which provides the shipper with payment security. However, logistics problems occur when L/Cs are opened late, creating tight timeframes in which to deliver the cotton to the vessel. This can cost the exporter extra money to meet the terms of the L/C. But that problem has been mitigated somewhat by changing operations with ocean shipping companies that are working to cut their own expenses.
“One positive that has arisen from the ocean carriers who have employed ‘slow steaming’ to conserve fuel is that it has lengthened the transit time, thus giving exporters the ability to bank their documents to meet Letter of Credit requirements in a timely manner,” Mallory says.
Keep Your Cotton at Your Fingertips
With so much of the world’s cotton being consumed in China and Southeast Asia, controllers need to become increasingly familiar with the intricacies of the region. Wakefield Inspection Services is among the most experienced in the world, having been weighing cotton in this part of the world for more than 50 years.
In 2012, the company opened new offices in Malaysia, Taiwan, Thailand, Philippines, Vietnam and Indonesia. “The only thing that has changed for us in recent years is the volume of business we do in that region,” says Peter Wakefield, the company’s managing director. “In order for us to ensure that controlling is carried out in a professional manner, we have had to go out and hire qualified personnel so we can teach them our methods.”
With higher prices, volatility in the markets and greater risks, the need for accurate and timely reporting is more critical than ever. The key to achieving that, Wakefield says, is to ensure the controller is always employing the latest technologies.
“Our new controlling platform has allowed us to provide weighing results to our clients in a more timely manner, which in turn allows them to settle any differences quickly with their buyers,” he says. “Continuing to offer IT solutions will be very important for controllers in the coming years, and we believe the biggest changes for us will be in this area.”
There has been an increase in spot business, which should allow for the option of consignment cotton, strategically located in the region to provide competitive advantages. For example, having a store of cotton in Malaysia would allow traders to offer buyers shorter delivery times.
For new merchants that seek to enter the these markets, it will be critical to have a known and trusted agent who has established relationships in the area, and an understanding of local import requirements and restrictions. Having a trusted ally on the ground can help avoid any pitfalls and unnecessary dangers when selling cotton to a new market.
“Working alongside CIQ, the controllers acting as the buyers’ representative have been able to develop a good working relationship with agency to ensure issues are resolved quickly and efficiently,” Wakefield says. “Because cotton consumption will remain high in this region for the foreseeable future, having a controller with local knowledge and relationships will always prove to be a valuable asset.”
Yarn Imports Won’t Last Forever
For years, China has been the world’s heavyweight in textile manufacturing, and while that doesn’t appear as though it will change any time in the near future, there has been a disturbing trend. In 2005, China’s capacity to produce synthetic fibers stood at about 1.1 million metric tons. It has increased more than tenfold since then, topping 12 million metric tons in 2013.
Because the country has been such a major consumer of cotton fiber for so long, China developed a huge cotton spinning capacity over the years. But price volatility has driven many mills to add capacity for synthetic fiber production, and the recent emphasis on yarn imports hasn’t helped matters, either. Cotton yarn is not subject to the same tough import quotas that raw cotton is, and mills save about $160 per metric ton when they import cotton yarn rather than buy it on the local market.
The outcome of these developments: A huge number of cotton spindles are sitting idle in Chinese spinning mills, according to Tony Hsieh of Wuxi, China-based Far Eastern Textile Mills.
In past years, China would increase its spindle capacity by 10 million spindles or more annually, but the last two years have only totaled 8 million spindles combined. In spite of the lower capacity increases, many mills are already operating at far less than maximum capacity.
“Overall, the utilization of cotton spindles in China is probably 60% to 65% of total capacity,” Hsieh says. “Many of the smaller mills – 30,000 to 50,000 spindles – are operating at about 50% of capacity, and very large mills sometimes are even lower, at 40% to 50%. Medium-sized mills have been the most efficient, at 70% to 75%.”
However, he remains optimistic that the trend to importing cotton yarn will have less of an impact on spinning mills than some fear.
“Cotton yarn imports have increased a lot in the last year, but I would estimate that it only amounts to about 1.5 million metric tons in total,” he says. “This represents a significant increase of about 30%, but that only accounts for 5% to 6% of China’s overall production (more than 30 million tons per year).”
In addition, Hsieh claims that the quality of the yarn produced domestically is generally higher than what is imported from India or Pakistan – two of the primary countries that have fed China’s appetite for imports.
Yarn prices in countries such as Indonesia, India and Pakistan are, indeed lower than they are in China, but it’s not that big of a difference – as little as 5%. That figure pales in comparison to the price mills must pay for domestic cotton, which can cost 50% more than fiber purchased in the international marketplace.
As a result, while Hsieh agrees that China’s neighbors in Southeast Asia likely will enjoy gains in market share, he doesn’t expect that to happen in leaps and bounds.
“Southeast Asian countries will increase their share of the world market step by step, but I don’t think it will be a big enough jump to affect China’s position very much, or very quickly,” he says. “China’s capacity to produce textile goods is much higher than the total of all of the other Southeast Asian countries combined.”
Equally important is the lack of complete supply chains in most of those countries. For example, Vietnam has about 4 million spindles in operation – a very respectable number – but there is very little capacity for producing finished goods.
“Finer finishing operations require high use of technology, and that costs a lot of money,” Hsieh says. “It also requires a lot of pollution control, so it’s not easy to add these capabilities quickly. I would think that Southeast Asia will gradually take some market share from China, but it won’t happen any time soon.”