As reforms to China's cotton liberalisation policy start to kick in, world cotton prices are expected to better reflect market demand. However, experts are concerned that if prices continue to drop, governments in other countries might be encouraged to intervene and offer a guaranteed price to growers, causing renewed uncertainty.

A report last month by the International Cotton Advisory Committee (ICAC) noted that international cotton prices have continued to fall since the end of the 2013/2014 season, when they were around US$0.80 per pound. "Given the predicted 1.8m tonnes of surplus cotton production and changes in China's cotton policy, prices are unlikely to rise to the levels seen in the last two seasons despite an anticipated increase in cotton consumption," it said.

These Chinese reforms are the most significant reason behind cotton's falling prices, explains José Sette, executive director of ICAC. "China over the last few years has been practising a policy of buying cotton [from its domestic producers] to help sustain prices especially for its growers, and for this season they have announced...they will not be buying cotton anymore.

"The Chinese [government] intervened when the markets were high and pulled the prices up even further, so that was a worst case scenario in terms of government intervention."

The report added that "with the uncertainty surrounding China's new cotton policy and no support evident for the provinces outside Xinjiang, the target province for the new policy, cotton [production] area in China declined 8% to 4.2m hectares in 2014/15. However, with greater incentive to improve yield and quality due to the new policy, Xinjiang, the largest cotton-producing region in China is expected to have a bigger harvest than last season."

In addition, unlike recent seasons when it imported much of the world's surplus production, China will not be providing additional import quota in 2015 beyond the 894,000 tonnes required by its World Trade Organization (WTO) commitments.

Meanwhile, India has expanded its cotton area by 5% this year, with farmers encouraged to switch to cotton because of a delayed monsoon. Production is likely to reach 6.6m tonnes, making it the world's largest cotton producer in 2014/15 - 100,000 tonnes greater than China's production.

The report added that world cotton consumption is expected to grow almost 4% to 24.4m tonnes, with consumption expected to continue growing in Bangladesh (950,000 tonnes expected), Vietnam (700,000 tonnes expected), and Indonesia (690,000 tonnes expected).

The drop in prices should boost cotton consumption, although Sette stresses it is difficult to predict by how much. "With cotton prices coming down, cotton should be in a much healthier position relative to other fibres and should start growing," he adds.

However, Sette notes that a prolonged drop in prices could trigger other challenges for the market. "Our concern is if prices fall much below where they are now, then other countries' governments will start to intervene in the market and support their farmers in various ways [through price support systems] - but they tend to operate when the market is at a low level."

Sette adds that while price is a key driver of fibres' short-term market performance, in the longer term, fashion trends also sway the market. For instance, he says fast fashion, especially in women's wear, is a key trend that may affect the market later on as it drives demand for cheaper, disposable materials such as polyester.

Synthetics steal market share
ICAC's report noted the market shares of other competing fibres have been growing - Sette says it is largely polyester that is benefiting. "The other fibres are more or less stable and they have relatively small shares of the market." He adds cotton currently holds around a 30% market share globally in apparel and textiles fibres.

Likewise, man-made cellulose fibre producer the Lenzing Group noted synthetic fibres such as polyester accounted for 61.8% of the global fibre market in 2013, while man-made cellulose fibres held 6.8% and wool held 1.3%.

In October, the PCI Synthetic Fibres Index showed little change in the world price of synthetic fibres in the previous 12 months. The index tracks the relative movement of prices for synthetic fibres by taking a weighted basket of prices for acrylic, nylon, polyester and polypropylene filament yarns, and staple fibres for Asia and the Far East on a cost and freight basis and the US and Western Europe on a delivered basis.

Prices for synthetic fibres in the world had dropped overall from an index level of 220.5 in October of last year [2013] to 206.7 one year later. The index marks a drop in Asia/Far East to 162.1 from 176.9 the previous year; and in Western Europe from 272.5 to 245.4. The US, however, marked a slight growth from 315.8 last year to 317.8.

However, "while the recent fall in cotton prices has led, as at August 2014, to some improvement in cotton's price relative to polyester and viscose, excess manmade fibre capacity, particularly in China, is still placing downwards pressure on polyester and viscose prices, even though they experienced an uptick in June and July," noted PCI Fibres, which compiles the index.

In addition, it noted that in response to higher prices in cotton over the past three seasons, mills, brands and retailers had reduced cotton consumption and opted for cheaper polyester filament and staple and also viscose staple - "the relatively greater stability in manmade fibre pricing being an added attraction."

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