Source: http://www.just-style.com

10 June 2013

China's massive cotton stockpiles have been interpreted as bearish for prices by the US Department of Agriculture - but analysts suggest a tight supply outside the country and the unwillingness of local textile mills to buy at auction will push prices higher into next season.

"I'm still bullish despite the massive surplus as most of it is stuck in China," said Kona Haque, head of agricultural commodities at the Macquarie Group.

China's government is slowly releasing its massive reserves of cotton stocks, which are expected to reach more than half the world's supply next season, but at prices near double those on international markets.

"The policy is designed to support cotton farmers but it's screwing the mills," Haque said, adding that China's mills are increasingly turning to tariff-free yarn imports from India and Vietnam instead of ruinously expensive domestic cotton. The USDA said in May that China's massive cotton holdings would ensure demand for imported supply next season will fall by 34% on the year to just 12m bales, pushing down prices in the process.

But tight supply in the US, a shift in global crop patterns towards grain and other crops over cotton, coupled with a steady uptick in global demand, will likely support cotton prices, possibly until they equalise with the Chinese government's auction price, according to Haque. "It'll take some time, but I can see prices touching US$1 again next year," she said.

Demand in China may also be helped by a return to market of its leading domestic sports brands, which are widely reported to be nearing the end of a prolonged destocking cycle. The Chinese-language Economic Daily reported on Monday (3 June) that inventory clearance is rapidly nearing completion, noting that Li Ning's warehouses in the western city of Chengdu and central city of Wuhan are now empty.

The report also quoted ANTA Sports chief executive Ding Shizhong as saying that his company's inventory digestion process was almost complete following shipments of outdated stock for sale in the Middle East and Africa. (Source: http://www.just-style.com)