World Cotton Consumption Prospects Worsen
Source: globecotnews Date: 2008-03-10
Unlike its partners in the grain markets, which are experiencing record demand, cotton demand is deteriorating by the day. In China, the world's largest cotton-consuming market, a major clamp down on credit is forcing small and medium-sized mills to close or cease operations, and it looks as if the tight credit problem is not going away, but likely to further tighten. This week, China's Premier Wen Jiabao stated that the government must take further action to tighten credit and reduce bank lending. This announcement triggered widespread fears that the Central Bank would raise domestic interest rates for a seventh time during a period of 12 months. In addition, spinners worry that already restricted bank credit lines will be reduced.
The Chinese government also appears to have adopted a policy of more rapid appreciation in the yuan to help offset inflation. The yuan has been steadily appreciating in 2008, recently breaching the 7.11 per U.S. dollar level. This continues to impact the competitiveness of apparel exporters who are already struggling against a sluggish competitive market. The National Textile and Apparel Council estimates that one out of every six Chinese textile and apparel exporters lost money in 2007, which occurred despite the country's textile and apparel export prices increasing an average of 8 percent. The restricted credit and rising labor costs are also two pressing issues. The more difficult export environment has caused many companies to increase the volume of goods moving into the domestic market, resulting in severe price competition in the domestic market that has kept average consumer prices declining for apparel despite the surging domestic price inflation. This situation has caused profits to be squeezed from every side.
China has major overcapacity in spinning, which has added to the profitability crunch over the past 12 months. The erosion in profit margins, rising cotton costs and the unavailability of credit is now taking a toll on the spinning sector. For some time now, the government has been warning the industry to slow investment, reduce overcapacity and move to higher value-added integrated operations. It appears the policy could be allowing the tighter credit to accomplish the task, forcing excessive capacity to shut down and for smaller entities to close; thus, it seems no aid to the sector is forthcoming.
Cotton consumption is also being impacted by a loss of market share to polyester staple fiber. China is the world's largest producer of polyester staple fiber, as output has rapidly grown over the past 12 to 15 months with large new facilities coming on line. In 2007, total man-made fiber production grew 15.3 percent to 23.9 million tons. The expansion has created overcapacity in this sector as well, keeping pressure on domestic polyester staple fiber prices. The direct link of rising international crude oil prices to polyester has also been further reduced in China by the regulated price of domestic crude oil and other raw materials associated with the production of PTA, the main polyester raw material.
This has kept the domestic polyester price under pressure, which is now near 11,520 yuan per ton, compared to cotton in a range of 13,900 to 14,900 yuan per ton for domestic cotton. The widening of the polyester premium to cotton is causing mills to increase polyester fiber use as a way of addressing profit margins. The only protection cotton has is linked to retail orders.
