| NEW YORK, July 10
NEW YORK, July 10 Switzerland's Glencore Xstrata
Plc will scoop up more than half of U.S. cotton
exchange stocks, a purchase worth more than $150 million, in the
commodity trader's biggest push into fiber since losing $300
million in the volatile market three years ago, U.S. traders
said on Wednesday.
In what exchange data showed was the largest delivery for a
July contract in at least five years, the firm will take almost
400,000 bales of cotton against the July contract that expired
on Tuesday on ICE Futures U.S., according to traders who
declined to be identified by name because they were not
authorized to speak to the media.
The deal effectively removes more than half of certified
exchange stocks from the market, potentially fueling concerns
about dwindling U.S. supplies and a small U.S. crop due to a
drought heading into the 2013/14 season on Aug. 1.
Nick Gentile, senior partner of commodity trading
consultancy Atlantic Capital Advisors, said there could be
"fireworks" if near-term supplies continue to tighten.
It is not thought to be Glencore's first foray into the
exchange stocks, but its presence is still significant as many
deliveries have been taken up in recent years by Cargill and
Louis Dreyfus, which have a bigger presence in cotton.
It is rare for smaller players to take delivery from the
board as it requires deep pockets, vast storage and logistics
For Glencore, the purchase gives it a large tonnage with
which to compete with the bigger rivals. The purchase represents
about a fifth of the cotton it sold in 2012.
A spokesman for Glencore, which is headquartered in Baar,
Switzerland, declined to comment.
Traders said Glencore has booked sales, most likely in China
or elsewhere in Asia, against the purchase in compliance with a
hedging exemption rule designed to ensure that speculators do
not artificially manipulate the futures market.
The sales will underscore expectations that demand from
China, the world's biggest textile market, may remain robust
even as the government looks to adjust its stockpiling policy.
The United States is the world's No. 1 cotton exporter.
The move also marks a comeback for Glencore from the turmoil
of 2011 when wild prices caused an unprecedented wave of
defaults, shredded trust among traders, hundreds of millions of
dollars in losses and triggered a high-profile personnel change.
It is also the firm's biggest public move since it installed
Colin Iles, who handled cotton trading for Cargill from 2008
through 2011, to restore the desk in June 2012.
Iles, who is based in Stamford, Connecticut, replaced Mark
Allen, who left in the wake of the 2011 turmoil.
Few players were unscathed by whipsawing prices, but
merchants, which act as agents between growers and mills, were
hit hardest as customers ripped up contracts as prices rose to
highs above $2.2 per lb and sank below $1 almost as quickly.
Both Noble and Olam said cotton's
volatility hurt earnings during 2011.
Though the International Cotton Association has said
contract defaults are stabilizing after hitting unprecedented
levels, traders still fear counterparty risk.
Glencore is a relative newcomer compared with the more
established players in the clubby cotton market centered around
Memphis, Tennessee. Louis Dreyfus' U.S. unit Allenberg was
founded in 1921.
Cotton represents just a sliver of Glencore's agricultural
business, the smallest of its three marketing divisions with
earnings of $361 million in 2012, just 8 percent of the group
$4.5 billion total, which is dominated by metals and mining.
The company sold 500,000 tonnes of cotton, or about 2.2
million bales last year, according to the 2012 annual report.
That compares with a global cotton trade of about 9.8
million tonnes in 2011/12 crop year, according to estimates from
the International Cotton Advisory Committee.
Traditionally its larger competitors have secured supplies
by owning stakes in growers co-operatives and have long-term
relationships with ginners.
DECLINING U.S. SUPPLIES
The delivery is expected to slash certified exchange stocks
by more than half and add fuel to prices that have risen on
concerns about tightening U.S. supplies and pushed nearby prices
on ICE to a premium above future contracts.
"Only some remnants of the current certified stock may
survive until December," said Peter Egli, director of risk
management for Plexus Cotton Ltd, a British-based medium-sized
merchant, in a market note.
Newedge USA LLC is the receiver of 2,882 lots of a total of
2,943 lots, according to the most recent ICE data, said to be
acting on behalf of Glencore.
Noble Group and Louis Dreyfus are among those delivering the
cotton, traders said. Both companies declined to comment.
While the delivery may affect availability, traders do not
expect it to be as explosive as in July 2011 when soaring
futures prices triggered allegations of manipulation.
Ex-Glencore trader Allen has accused Dreyfus of squeezing
the July contract, in one of the highest profile commodity
manipulation lawsuits in more than a decade. Louis Dreyfus has
denied the allegations.