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Record cotton defaults show no signs of slowing in Q1 - ICA
January 3, 2013 / 9:45 PM / 5 years ago

Record cotton defaults show no signs of slowing in Q1 - ICA

* Defaults at all-time high in 2012

* News comes even after measures to improve contract sanctity

NEW YORK, Jan 3 (Reuters) - 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 Association (ICA).

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 fallen.

“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 stockpile.

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 reduced.

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.

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