A 10% decline in cotton production is expected in China

A 10% decline in cotton production is expected in China

First signs of the impact of changes introduced last month to the Chinese government's cotton policy are being seen in higher domestic sales and falling prices - but could also lead to a drop in cotton production and imports, an inter-governmental group has warned.

The monthly update from the International Cotton Advisory Committee (ICAC) notes that since the beginning of April, when the Chinese government announced a lower starting auction price for sales from the national reserve, sales have increased and prices fallen.

Indeed, the Type 328 China Cotton Index - a daily index of prices for domestic cotton offered to mills in China - fell from this season's nine-month average of 144 cents/lb to about 129 cents/lb by the end of April, it said.

But although lower cotton prices "are welcomed by the mills in China," the group added that "a lot of damage has been done to the industry in the past few years by the Chinese government's cotton policy."

Launched by back in September 2011 in a bid to tackle soaring cotton prices, the reserve policy is blamed for a 17% drop in mill consumption, from 9.6m tons in 2010/11 to 7.9m tons in 2013/14. In 2014/15, the decline in consumption in China is expected to slow, falling by just 1% to 7.8m tons.

However, the next three largest consumers, India, Pakistan, and Turkey are all expected to see growth in their mill use in 2014/15. World consumption in 2014/15 is expected to reach 24.3m tons, an increase of 3% in comparison with the previous year.

While world mill use is forecast to increase in 2014/15, world production is seen declining by 2% to 25.2m tons, according to the latest ICAC figures, narrowing the gap between world production and consumption.

In 2014/15, India is expected to produce nearly 6.3m tons, which is a decline of 2% due to the expectation that the monsoon weather will not be as favourable as in 2013/14.

Most of the decline in world production will occur in China, where production is expected to fall by 10% from 6.7m tons in 2013/14 to 6m tons in 2014/15. As the Chinese government has restricted its support for cotton to just the Xinjiang region, the area outside is expected to fall significantly.

World trade is expected to decline in 2014/15 to 8.2m tons from 8.7m tons forecast for 2013/14. As with production, this decline stems mostly from China, where imports in 2014/15 are expected to be 2.2m tons, down by 30% from 2013/14 and 60% from its peak of 5.3m in 2011/12.

However, China's decline will be partially offset by imports from Bangladesh, Indonesia, and Vietnam, which are expected to import a total of 2.4m tons in 2014/15 - an increase of 13% from 2013/14.

As reported on just-style last month, China's cotton industry faces enormous pressures, especially in terms of quality control. Domestically grown cotton is of a much lower quality than imported cotton, with shorter length fibres that are more difficult to spin into yarn, generating more losses in production and leading to a rougher fabric feel.

The cotton being auctioned off is likely to come from crops that have been in storage for more than a year and may have deteriorated even further.

Click on the following link to read: ANALYSIS: Changes in China's cotton policies create uncertainty