Chinese textile mills expect drop in cotton prices with state reserve auction

The National Development and Reform Commission of China announced late last year that China will offer 30,000 tonnes of cotton per day for sale until the end of August, as Beijing seeks to scale down its large, ageing stockpile.

China’s textile mills have worked off cotton inventory in the hope of picking up lower-priced fiber when the government in the world’s top textile market resumes annual sales of state reserves on Monday even after getting caught short last year.

Ye Jianchun, vice president of China Cotton Textile Association, at an annual cotton industry conference held in Beijing on Friday said that most of the companies have low stocks, as they expect cotton prices would drop with the coming state reserves auction. They are also confident that the quality of auctioned cotton would be quite good.

Last year, delays in the auctions until May from March and poor quality of the fiber in the first few sales tightened supplies, leading to panic buying by mills and spurring a surge of almost 70 percent in prices in just under nine months.

The most-active futures hit 4-1/2-year highs in November. Industry insiders, however, think this year will be different.

A purchasing manager at a textile company in Shandong province, a major producer of the fiber, said that she only had one month of cotton in stock, rather than the usual two to three months of inventory. Last year, (the auction) was rushed. This year, (the government) is better prepared.

Traders are confident that the government will be able to meet its daily auction target this time, and prices will drop, at least in the short term. Still, hurt by price volatility last year, the industry is more guarded against potential risks.

Wei Gangmin, chairman of Henan Tongzhou Cotton Trade Co Ltd, a cotton trader and processor in China with 11 ginning mills and two spinning mills said that if the government meets its promise, in terms of the volume and quality structure of the auctioned cotton, it will benefit the market a lot.

Wei said that if it fails, it will cause volatility. If prices push up, it would restrain demand and obstruct the goal of reducing stocks.

As China holds more than half of the world’s stocks in reserves and an increase in domestic supplies would further dent imports. China’s state sales are being closely watched by the International market.