July 28, 2016 / 4:42 AM / 3 years ago

China mills seek more cotton from state reserves to ease supply squeeze

BEIJING (Reuters) - China’s mills are urging the government to release more cotton from state reserves, as fewer quotas for low-tariff imports and higher demand for local yarn tighten supplies.

A farmer picks cotton from a field in Hami, northwest China's Xinjiang Uygur autonomous region, November 1, 2012. REUTERS/China Daily/File Photo

Greater dependence on reserves at the world’s top importer could dent a rally in global cotton futures that hit a two-year high this month. But in the long term, it could be bullish for prices as China runs down its massive stockpiles.

“They need to sell more from the state reserves. The limited quantity is a major problem,” said Ashley Liang, general manager of import and export at the spinning division of Dahai Group, a conglomerate in eastern Shandong province.

Already, 1.57 million tonnes have been sold via auctions, nearly 100 percent of the volumes offered since sales started in May, but traders say more was needed to meet an annual demand of 7 million tonnes given output and imports are on the wane.

China’s January-June cotton imports more than halved from a year ago.

Strong demand for reserve cotton, estimated at more than half of global stocks, follows last year’s dismal sales when the government shifted just 3.4 percent of its stocks due to high pricing and a slowing economy.

Bids from China’s mills, which cleared out stocks on hopes the government would sell at lower prices to attract buyers, as well as from traders have led to stronger sales this year.

“We hear from most mills that demand is better than half a year ago. I visited clients last week and saw no yarn stocks lying around,” said another trader.

China had said it would increase the daily volumes on offer to 50,000 tonnes if more than 70 percent of the auctioned volume was sold three days in a row. However, the maximum cotton offered has remained at 30,000 tonnes.

Beijing is unlikely to lift volumes given logistical constraints, but it could extend the selling period by a month to September, offloading more than an initially expected 2 million tonnes, industry participants said.

The National Development and Reform Commission, which manages the reserves, did not reply to a fax seeking comment.

Firm demand has pushed up auction prices by 20 percent since the sales began to 15,201 yuan ($2,281.82) per tonne on Wednesday, versus Zhengzhou prices now around 15,050 yuan. Global futures are near $1,625.

Mills, which met in Beijing recently to discuss the reserve sales, said higher prices were threatening consumption.

“The rise in cotton prices can’t be passed on downstream, leading to some companies being forced to limit or stop production,” said a China Cotton Textile Association report.

Reporting by Dominique Patton; Editing by Himani Sarkar

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