* Proposal would require mills to buy state reserves -
* Beijing's stockpile equates to over a third of global
* Move seen tackling mills' problems of tight supplies
(Adds background in paragraphs 3-6)
By Niu Shuping and Josephine Mason
BEIJING/NEW YORK, Jan 4 China, the world's
biggest cotton consumer and importer, is considering issuing
fresh import quotas and selling some of its massive cotton
stockpile in a move merchants and analysts say is aimed at
heading off a potential crisis in the world's largest textile
The much-anticipated proposal, which allows spinning mills
to buy more foreign raw cotton, is still under consideration,
said sources who declined to be identified as they were not
authorized to talk to the media. But if approved, the quotas
will require mills to buy three tonnes of cotton from state
reserves for every tonne they import, they said.
On Dec. 28, top planning agency, the National Development
and Reform Commission (NDRC), said in a statement it would
auction off an unspecified amount of cotton from its
record-sized reserve but gave no further details.
Beijing has been building a strategic stockpile of cotton
since 2011 with the aim of supporting farmers, who are
considered crucial to feed the country's growing urban
But while helping growers, the policy has hurt China's
textile mills, sucking supplies out of the domestic market and
forcing them to rely on imports.
Combining an auction of state reserves with fresh imports
resolves two issues facing the government: after its two-year
buying spree, it can offload some older stock while offering
much-needed respite to the country's spinning mills, which have
struggled with tight domestic supplies and high local prices.
"It is (a) compromise by the government to help quieten down
complaints by textile mills," said Jian Jinglei, an analyst with
Shanghai CIFCO Futures.
By March, Beijing is expected to have accumulated some 8.6
million tonnes of fibers, enough to supply China's mills with
raw material for a year. That also equates to more than a third
of global 2012/13 output.
"They've helped the farmers out. They now have to make sure
the mills have a chance to remain competitive," said Peter Egli,
director of risk management for Plexus Cotton Ltd, a UK-based
medium-sized merchant which does business in China.
"(The government) has to let stocks go or imports come in or
a combination of both, which is what is rumored," he said.
It is not clear if the new imports quotas would be a duty
free basis or on a sliding tariff system, but foreign prices are
about 20 percent cheaper than local fibers, merchants say.
Last year, China issued import quotas for more than 3.7
million tonnes at sliding tariffs of 5-40
AUCTION AND IMPORTS SOLVE GROWING PROBLEM
The proposals come after months of speculation about how
Beijing would solve the problems caused by the stockpiling.
During the latest harvest in 2012, the reserve scooped up an
estimated 75 percent of the country's 6.9-million-tonne crop,
forking out as much as 18,500-19,000 yuan per tonne. That was on
top of its massive purchases in 2011.
That equates to about $1.35 per lb, about 20 percent more
than it typically costs mills to import foreign fibers. It is
also double the benchmark price on ICE Futures U.S.
Only a limited number of mills, however, are allocated
import quotas, which means the majority have to pay expensive
domestic prices, making them uncompetitive.
Companies that can import cotton also often sell their
purchases to other mills at a huge profit, adding to the cost
burden for textile mills. Integrated mills also buy yarn, a
semi-processed product that doesn't incur a duty, as an
China's cotton imports in the first 11 months of the year
2012 jumped 79 percent compared to the previous year to a record
4.6 million tonnes.
BEARISH FOR PRICES
News that the state would release some of its hoard struck
at the heart of many U.S. merchants' fears about how long the
government's stockpiling would last. It is not clear if the
government will replenish its stocks after the auction.
The reserve policy has been a key prop to the market while
mill consumption has flatlined.
"It's hard to see the positive in this. They've been nothing
but buyers for so long," said a U.S.-based broker.
Any increase in imports could boost U.S. cotton though, as
the United States is the largest exporter of the fiber to China.
Bulls also took comfort on the expectation that any auction will
likely be minor compared with the overall size of the hoard.
"What matters in the long run is that imports are likely to
continue, albeit at a reduced rate," said Egli.
($1 = 6.2303 yuan)
(Editing by Miral Fahmy and Kenneth Barry)