Additional Chinese import tariffs remain a potential concern in the global cotton trade

Additional Chinese import tariffs remain a potential concern in the global cotton trade

Threats to impose higher tariffs on Chinese imports of cotton from the US – the world's leading exporter of the fibre – are adding another layer of uncertainty to the cotton market.

Import tariffs remain a potential concern in the global cotton trade, the International Cotton Advisory Committee (ICAC) confirmed in its latest monthly forecast released this week; while US-based Cotton Incorporated has gone one step further in warning that if the proposals are enforced, they will influence trade patterns.

Raw cotton is one of many products caught up in the ongoing trade row between Washington and Beijing resulting from an investigation into unfair Chinese technology and intellectual property policies and practices.

President Donald Trump last month signed an executive order to levy tariffs on US$50bn of imports in China, Under Section 301 of the Trade Act – with an even larger list of additional goods, collectively valued at $100bn, also under consideration. China hit back with its own list of goods subject to possible retaliatory duties – including an additional 25% duty on US cotton.

US cotton is a key import for the Chinese clothing industry; and China is the US's second largest export market.

"Despite lowered projections for 2017/18, the United States remains the leading global exporter and will likely remain so in the 2018/19 season with exports projected at 3.5m tons," the ICAC notes in its latest monthly forecast released this week.

Looking at the wider picture, the inter-governmental group notes that cotton prices have so far remained high in the 2017/18 season, at an average of 84.63 cents per pound as measured by the Cotlook A index. But it trimmed its forecast for cotton prices in 2018-19 to 82 cents/lb.

The body also says higher prices are expected to lead to moderate growth in planting for the 2018/19 season, which starts in August. World area under cotton has averaged 32.4m hectares over the last ten years.

New support policies for cotton in the US were passed in February, and its planted cotton area is expected to increase in 2018/19 by 11% to 5.08m hectares. However drought conditions remain a concern for the cotton area in West Texas, which represents around 25% of US production, the ICAC says.

Planted area in India is expected to decrease to 11.9m hectares in 2018/19. Chinese planted area is expected to remain stable based on the continuation of Chinese support policies.

The Chinese reserve auction to sell cotton stocks this year began in March and is expected to continue through September, thus far releasing 30,000 tons per day for sale. Daily sales through April have sold 100% of high quality Xinjiang quantities available, while lower grades have sold at 25% of available quantity.

Meanwhile, world cotton consumption is expected to continue to grow steadily through 2018/19 to a projected 26.7m tons, up from 25.5m tons estimated in 2017/18.

Factors buoying cotton include strong textile demand in emerging markets, the rising production costs of synthetic fibres, and growing awareness of the environmental damage being caused by microfibre pollution.

Global imports are also expected to increase to leading importers, with those into China projected to continue to increase for the fourth consecutive year to 1.5m tons. While Chinese import figures continue to increase, Bangladesh remains the leading global importer.

Possible impact on trade patterns

In its latest monthly update, Cotton Incorporated, the research and marketing company representing US growers of upland cotton, says that while it remains unclear if any of the proposed tariff increases will actually be enforced, there would undoubtedly be an impact on trade patterns.

"One outcome that could be expected is that US exports to China would decrease because with the additional 25% duty US cotton would become more expensive relative to other origins.

"However, the size of the decrease would be smaller than if the tariffs were imposed several years ago. A reason for this is that China sharply reduced its imports from all origins in recent years as it encouraged the mill-use of government-controlled reserve stocks over imports.

"As a result, US exports to China in the past two crop years have been 0.9m and 2.3m bales, much lower than the longer-term average over 4m bales. With US exports to China already lower, there is simply less room to fall than there would have been several years ago."

As US sales to China have fallen, they have increased to other markets, notably to Vietnam and South Asia.

Even so, "the importance of China as a customer of US and global cotton exporters should not be understated," Cotton Inc says.

"Given the drawdown in reserve stocks over the past several years, China is approaching the transition point when it should begin to import significantly more cotton. The prospect of China eventually returning to import volumes between 10-15 million bales should be encouraging for cotton exporters all over the world."

Should tariffs coincide with increases in Chinese imports, it would affect the volume of US cotton that could go to China. But Cotton Inc believes that if China pulls in more cotton from other exporters, this would in turn push up US exports to other markets.

The group also notes that when it was announced that cotton was listed among the US products that China could hit with an increase in tariffs, NY futures declined sharply.

But prices have since completely recovered and have been relatively stable. The latest values for the May and July contracts have been holding near 83 cents/lb while December futures have been holding near 78 cents/lb.