* Mills will get 1 tonne import quota for 4 tonnes of state
* Beijing eager to liquidate massive cotton stock piles
* High transport costs, poor quality may still weigh on
(Adds analyst's quotes, details on quota plan)
By Niu Shuping and Fayen Wong
BEIJING, March 27 China, the world's largest
cotton buyer, will require local mills to buy more of the fibre
from its bloated state reserves in exchange for import
allowances this year, three sources with knowledge of the matter
said on Thursday.
The move, aimed at reducing burgeoning state inventories
that now account for 60 percent of global stocks, could weigh on
imports and global prices of cotton, especially since Beijing
has already slashed sales prices for the fibre from its reserves
to narrow the advantage of overseas supplies.
The government will give mills one tonne of import quota
under a sliding tariff system for every four tonnes of cotton
purchased from the state reserves during auctions from April 1,
the sources said.
Government officials were not immediately available for
The ratio was set at 1-to-3 last year.
"It (the policy) has already been decided, but government
authorities may not publish the details on import quotas," said
one industry source who has been notified of the new rules.
Investors have been closely tracking China's cotton import
policies after Beijing announced in December that it will end a
three-year cotton stockpiling in the 2014/15 season.
With the government now holding more than 10 million tonnes
of cotton reserves after 3-years of stockpiling, there were
concerns that a more aggressive state sale programme would hurt
Beijing decided earlier this week to cut the bidding price
for its cotton reserves to as low as 17,250 yuan ($2,800) per
tonne, causing New York cotton futures to fall on fears that it
would stymie import demand.
The cut in reserve sales prices and continued access to
cheaper overseas supplies will help mills lower their cost
burden, analysts said.
"The actual cost for mills will decrease quite substantially
by about 1,000 yuan per tonne," said Dong Shuangwei, chief
analyst with Beijing DSW Investment Consulting Co. Ltd.
"Mills may be encouraged to bid more state reserves," he
said, estimating that as much as 400,000 to 500,000 tonnes could
be sold every month, higher than current level of about 170,000
Textile mills could be given import quotas based on the
monthly tonnage bought from state reserves. But with Beijing
eager to liquidate its massive reserves, the government may well
drag its feet on issuing the import quotas, said one industry
Pressure on China to whittle down its stocks has been
growing. China's top agricultural bank has urged Beijing to
speed up the sale of its state grain and cotton reserves, now at
record high levels, to help ease the bank's mounting debts,
state media reported last week.
However, some local traders said it was not immediately
clear how the new 4-to-1 ratio would affect import demand, as
success of the daily state auction program would also depend on
the quality of the fibre.
"Mills in the east will also take into consideration the
transportation costs to bring the cotton from Xinjiang and the
quality and so on," said a cotton trader.
Most of the state warehouses are located in the northwest
region of Xinjiang and transportation by rail to mills in
Shandong province costs about 700-900 yuan a tonne, trade
sources said, adding that frequent congestion and delivery
delays were also headaches for mills located in the east.
The benchmark May cotton contract on ICE Futures U.S.
fell 2.6 percent on Wednesday to 91.66 cents a lb. China's
cotton futures on the Zhengzhou Exchange stood at 1.5 pct at
15,770 yuan per tonne.
($1 = 6.2094 Chinese Yuan)
(Additional reporting by Chris Prentice in NEW YORK; Editing by