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Cotton Outlook Shaped by China’s Policy, Fiber Competition

National Cotton Council sees improved demand amid difficult environment.

National Cotton Council economists told delegates at the group’s annual meeting in Memphis on Saturday that the outlook for cotton this year will be influenced by China’s policy decisions and continued competition from man-made fibers.

This story first appeared in the February 12, 2013 issue of WWD.  Subscribe Today.

Gary Adams, NCC’s vice president of economics and policy analysis, said recent data on fiber market share demonstrates the many challenges from synthetic fibers.

“Measured on the basis of pounds of cotton fiber, the 2012 U.S. retail cotton market [about 17 million bales] fell to the lowest level since 1996, amid a fourth consecutive year of declining market share,” Adams said.

In part, the loss in market share is the result of cotton prices that have been uncompetitive with polyester prices. As raw fiber prices have moderated in recent months, cotton textile products also have become more competitive with man-made fiber products. Assuming these relative prices continue at levels comparable to current values, market share is projected to stabilize, leading to a modest growth in cotton net domestic consumption for 2013, Adams said.

“However, cotton is unlikely to reclaim market share unless cotton prices trade at levels below polyester,” he said.

U.S. spot cotton is currently selling for about 76 cents a pound, while polyester staple is at 91 cents a pound and polyester filament is at 80 cents a pound.

The NCC sees 2013 world mill use of 108.7 million bales, an increase of 2.5 percent from 2012. More specifically, international mill demand outside of China is estimated to increase 5.7 percent for the 2013 crop year, with more than half of the growth being accounted for by India and Pakistan.

“This demonstrates that a shift is under way in terms of where cotton is spun into yarn,” Adams said.

Continued growth in mill use is being supported by the relatively stable price pattern of recent months, more competitive prices when compared with polyester, and more favorable spreads between yarn values and fiber prices, he noted.

China’s current policy is another factor lending support to mill use in other countries. By purchasing its domestic production at prices 40 to 50 cents above world prices, China is ensuring that its internal prices are well above world prices and causing its cotton spinning to be uncompetitive, Adams noted. Fabric manufacturers in China are increasingly looking to fill their yarn demand with imported product.

China’s policy, while supporting prices received by farmers, acts as a tax on textile mills and has furthered the shift to man-made fiber. Continuing to operate the program in a manner similar to the past year will maintain pressure on China’s cotton spinning mills. As a result, China’s mill use for the 2013 marketing year is expected to fall to 34.3 million bales. With the support price well above world market prices, the vast majority of China’s domestic production will enter government reserves.

“The coming year is shaping up to be a challenging year where uncertainties regarding the market are magnified by the 40-million-bale gorilla that is China’s government reserves,” Adams said.

After consecutive annual declines, cotton demand has stabilized and is expected to grow in the coming year. Adams said with a recovering global economy, there is strong potential for growth in cotton demand. However, that full potential will not be realized as long as China continues to operate its current policy.

Reduced imports by China are only partially offset by increased imports in other countries, leading to a decline in world trade from 38.9 million bales to 36 million bales. The U.S. is projected to see a decline in exports for the 2013 marketing year, down 1.6 million to 10.6 million bales.