Global demand for cotton fell in 2010/11 according to separate estimates by the three main forecasters - the International Cotton Advisory Committee (ICAC), the US Department of Agriculture (USDA) and Cotton Outlook. ICAC estimates that global cotton consumption fell by 2.7% in 2010/11, the USDA estimates a 3.0% decline and Cotton Outlook estimates that consumption fell by 3.8%. The fall in consumption was most intense in the second half of the season due to a combination of a shortfall of cotton available for sale and delivery this season and record high cotton prices which brought sharply lower demand for raw cotton. Furthermore, with the recent sharp fall in cotton prices in response to the lower demand, spinners are reported to have significant amounts of high-priced cotton yarn stocks which they are having trouble selling, exacerbating the drop-off in demand for raw cotton.
The chart shows the trends in mill consumption of cotton in the major consuming countries. There was a significant fall in consumption in China in 2010/11 and in ‘other’ countries. However, mill consumption in India jumped in response to the Indian Government’s ban on raw cotton exports.
The high cotton prices have in some countries resulted in mills substituting cotton with synthetic fibres, notably polyester and viscose (rayon). This is a significant reason for the lower demand for cotton. This loss of competitiveness for cotton is illustrated by the ratio of cotton prices to polyester prices. This ratio increased from 1.09 in July 2010 to a peak of 2.05 in February 2011. This was the highest ratio since statistics began in the 1960s and well above the ten year average of 0.99. Polyester staple consumption and production has risen in China, the US and Europe in 2011, although there are signs that this slowed in May, according to PCI Fibres (polyester staple is used in woven apparel products in competition with both cotton and wool). In contrast to the better demand for polyester staple, demand for acrylic fibre has been subdued or even depressed in most regions, according to PCI Fibres, as the result of spinners running down stocks built up in 2010. Acrylic fibre is used for knitwear, among other things, and competes with both wool and cotton. Demand for viscose fibre in China (the largest producer) has also fallen in recent months.
ICAC, the USDA and Cotton Outlook all expect global cotton consumption to increase in 2011/12, although the forecast increase has been wound back in the past month. One of the key questions for all textile fibres is the willingness of consumers to accept the inevitable higher prices for textile products (apparel or interior textiles). With food and utility prices rising in many countries, consumers may resist higher textile prices and defer purchases of textile products, including of apparel. This may negatively affect the demand for raw wool in 2011/12.
The production and supply of competing fibres both in the 2010/11 season and in the prospects for 2011/12 has been driven to a significant degree by the surging cotton prices over the 2010/11 season.
Global cotton production is estimated to have increased sharply in 2010/11 after three successive years of falling production. The three cotton forecasters (USDA, ICAC and Cotton Outlook) estimate that production increased by between 9.6% and 13% as the result of increased production in key countries due to improved seasonal conditions and higher plantings in response to the higher cotton prices. The chart shows production by major cotton producing country, with strong increases in several countries in 2010/11.
There are no updated estimates of world synthetic fibre production for the 2010/11 season, but information from PCI Fibres indicates that production of polyester staple have increased over the past 12 months, mainly due to increased production in China. In contrast, acrylic and viscose fibre production have both declined in recent months in response to the lower demand levels and subdued prices.
A further increase in world cotton production is expected in 2011/12 as cotton growers have upped plantings in response to the record cotton prices. The USDA predicts that world cotton production will increase in 2011/12 by 8% to a record level, boosted by higher production in China, India and Pakistan as well as Australia and Uzbekistan (two of the larger exporters of cotton). This will more than offset an expected fall in production by the USA, the largest cotton producing country, due to an extensive drought in important cotton growing regions and floods in other regions.
PRICE TRENDS AND OUTLOOK
World cotton prices have fallen sharply in the past three months as the fundamental balance between supply and demand has changed. The CotLook A Index (the world cotton price indicator) reached a week-ending peak of 236 USc/lb (521 USc/kg) in mid-March. However, cotton prices have fallen back, with the CotLook A Forward Index (for cotton delivered in September 2011) to 114 USc/lb (252 USc/kg) for the week ending 22nd July. This is a drop of 52% in just four months. At the same time, for wool the Eastern Market Indicator increased by 9% in US$ terms. Wool has lost competitiveness, with the wool to cotton price ratio lifting from 2.54 in March to 5.62 in July. This is well above the ten year average of 4.53.
Similarly, wool’s competitiveness with synthetic fibres has fallen, with the wool to synthetic fibre price ratio rising from 4.30 to 5.45, and well above the ten year average of 3.62. The changes in competitiveness for wool are likely to mean that mills will substitute wool with other fibres, most likely synthetics in blends in both woven and knitted fabric. This could mean that wool prices will come under pressure in coming months.