* Defaults at all-time high in 2012
* News comes even after measures to improve contract
NEW YORK Jan 3 Disputes over defaults in cotton
contracts hit a fresh record high last year and show no signs of
slowing down as the fallout from the soaring prices to all-time
highs and their subsequent collapse two years ago continues to
roil the industry, the U.K.-based International Cotton
The news will reinforce mounting concerns in the industry
about how to resolve the deepening crisis that has left few
merchants unscathed and counterparty trust in tatters.
In a statement on Thursday, the ICA said it dealt with 247
applications for arbitration in 2012, up from the previous
record of 242 in 2011. That is over five times the normal yearly
average, it said.
While the fresh record may not surprise most in the
industry, many merchants may be alarmed that ICA President Ahmed
Albosaty cautioned that the rate of legal clashes has not
"It is extremely difficult to predict how the situation will
evolve during 2013, but as we move into the first quarter the
pace does not seem to be slowing down," he said in a statement.
The ICE introduced a series of measures in 2012 aimed at
enforcing the sanctity of contracts and policing trading
practices through a newly-created business intelligence team.
But while trade organizations oversee arbitration cases
using internationally-recognized procedures, many foreign mills
have refused to honor awards handed out. Mills in Bangladesh,
Indonesia, Thailand and Vietnam are some of the worst offenders,
the National Cotton Council said last year.
Host governments appear to be protecting the foreign mills
from enforcement of awards, a concern exacerbated in cases in
which the mills themselves are state owned, the National Cotton
Council has said previously.
Elbosaty said the ICA plans to introduce measures to cut the
cost and time of arbitrations and improve their quality in order
to increase the chances of enforcing the awards.
"Trading with defaulters is not a good business strategy nor
is it an honourable way to do business. If the cotton community
sticks together and stands firm on defaulters, then we may be
able to reduce the stress being placed on the cotton supply
chain," he said.
Even so the practice of ripping up of a contract has become
one of the industry's biggest headaches, doing long-term damage
to relationships between merchants, who act as agents between
growers and mills, and their customers.
In early 2011, growers were the first to walk away from
sales to merchants as cotton prices hit record levels as a
drought wiped out much of Texas' crops and China, the world's
largest textile market, was buying fibers for its strategic
With the market fearing a supply squeeze, prices trebled
from around 60 cents lb in August 2010 to $2.27 a lb in March
2011. As those concerns receded, so did prices, dropping almost
as quickly as they had risen to back below 70 cents.
That triggered the second, longer lasting wave of defaults
as textile mills reneged on purchase agreements they had signed
when prices were surging.
Some of the arbitration proceedings still being filed may go
back as far as 2011, but many merchants say the industry is
still plagued by defaults even though price volatility has
In a stark warning last year, a trade delegation including a
representative from one of the world's biggest merchants,
Cargill Inc, told senior government officials that
cotton worth $1 billion was either in default or at risk of
default by textile mills.