COTTON : Review of the World Situation Discover Natural Fibres Initiative Table of Contents Tables

Transcription

1 COTTON : Review of the World Situation Discover Natural International Cotton Advisory Committee Fibres Initiative Volume 66 - Number 2 November-December 2012 Table of Contents SUMMARY OF THE OUTLOOK FOR COTTON... 3 Global Cotton Production to Continue Declining in 2013/ Global Cotton Production will be Smaller in 2013/ Factors Driving Global Cotton Plantings Down in 2013/ Expectations in the Largest Producing Countries... 5 Cotton Price Volatility on the Decline... 7 ICAC on Volatility... 7 Low Volatility in 2012/ CHINA CONTINUES TO BUILD ITS STATE RESERVE... 9 Where s the Way out for China s Textile Industry? Trends in Cotton Yarn Manufacturing in Southeast Asia A Return to Stability China Regional Dynamics Conclusions and Challenges Inefficiency and Atrophy in China s Spinning Sector Provide Opportunities for Others Meet My Friend In The Business The Textile World Goes The Way Of China India: The Hand That Feeds China A New World Beckons: The Future of Spinning in China and Elsewhere Tables Supply and Distribution of Cotton /12 Supply and Use of Cotton by Country /13 Supply and Use of Cotton by Country /14 Supply and Use of Cotton by Country...22

2 Seasons begin on August 1 ICAC SUPPLY AND DISTRIBUTION OF COTTON December 3, / / / / / /14 Est. Proj. Proj. Million Metric Tons BEGINNING STOCKS WORLD TOTAL CHINA USA PRODUCTION WORLD TOTAL CHINA INDIA USA PAKISTAN BRAZIL UZBEKISTAN OTHERS CONSUMPTION WORLD TOTAL CHINA INDIA PAKISTAN EAST ASIA & AUSTRALIA EUROPE & TURKEY BRAZIL USA CIS OTHERS EXPORTS WORLD TOTAL USA INDIA BRAZIL AUSTRALIA CFA ZONE UZBEKISTAN IMPORTS WORLD TOTAL CHINA EAST ASIA & AUSTRALIA EUROPE & TURKEY PAKISTAN CIS TRADE IMBALANCE 1/ STOCKS ADJUSTMENT 2/ ENDING STOCKS WORLD TOTAL CHINA USA ENDING STOCKS/MILL USE (%) WORLD-LESS-CHINA 3/ CHINA 4/ COTLOOK A INDEX 5/ * 1/ The inclusion of linters and waste, changes in weight during transit, differences in reporting periods and measurement error account for differences between world imports and exports. 2/ Difference between calculated stocks and actual; amounts for forward seasons are anticipated. 3/ World-less-China's ending stocks divided by World-less-China's mill use, multiplied by / China's ending stocks divided by China's mill use, multiplied by / U.S. cents per pound. * Average for the first four months of 2012/13 (August to November 2012).

3 November-December SUMMARY OF THE OUTLOOK FOR COTTON Global Cotton Production to Continue Declining in 2013/14 Cotton plantings for 2013/14 will start in a few months. While cotton prices are down in 2012/13, those of major competing crops (maize, soybeans and wheat) are significantly up. As a result, the attractiveness of cotton at the farm level is continuing to erode. The Secretariat projects global cotton area to contract by 9% to 31.5 million hectares and production to decrease by 11% to 23.2 million tons. This would be the second consecutive season of decline in cotton production and the smallest output in four years. Cotton production in 2013/14 is expected to fall sharply in the United States (-25%) and Turkey (-30%), where competition with grains and soybeans is strong. Smaller crops are also forecast in China (-11%), Pakistan (-9%), Central Asia (-13%) and Francophone Africa (-10%). Production is projected only slightly down in India, assuming a recovery in the average yield after two years of decline. Australian production could decrease by 14% if dryness returns. At this stage, only small reductions in production are expected in other southern hemisphere countries as they will plant cotton six month later than northern hemisphere countries and may be seeing stronger cotton prices at that time. Planting intentions for 2013/14 will likely change over the next few months, depending on final farmers returns from the 2012/13 crop and evolving commodity price relationships. Global cotton mill use is expected to continue growing slowly in 2013/14, on the basis of a timid recovery in global economic growth. However, a small gain in cotton prices could constrain the increase in demand for cotton. The Secretariat forecasts global cotton mill use to rise by 3% in 2013/14 to 24.2 million tons, driven by South Asia. Cotton mill use in China, the largest consumer, is projected down by 2% to 8.4 million tons. Cotton (ISSN ) is published every two months by the Secretariat of the International Cotton Advisory Committee, 1629 K Street, NW, Suite 702, Washington DC. Editors: Armelle Gruère <armelle@icac.org> & Alejandro Plastina <alejandro@icac.org>. Desktop publishing: Carmen S. León. Subscription rate: $ (hard copy); $ (electronic version). Send address changes to COTTON, 1629 K Street, NW, Suite 702, Washington DC Copyright ICAC No reproduction is permitted in whole or part without the express consent of the Secretariat.

4 4 COTTON World Ending Stocks Million tons 18 China World less China /04 05/06 07/08 09/10 11/12 13/14 In contrast, cotton mill use in India and Pakistan could grow significantly, driven by ample supply of cotton in the region and lower yarn production costs. World cotton trade could remain almost stable at 7.8 million tons in 2013/14, as an expected further drop in Chinese imports could be offset by increased demand from the rest of the world. The Secretariat assumes that China will import less cotton in 2013/14 than needed to fill the gap between consumption and production, and that the national reserve will contract slightly to make up for this difference. Import demand from Turkey, Bangladesh and Pakistan is expected to grow significantly. After three consecutive years of increase, global stocks could shrink a little in 2013/14. The Secretariat expects them to contract by 6% from the record level of 16.6 million tons expected in July 2013, to 15.6 million tons in July Most of this reduction in stocks is expected to take place outside of China. Inside China, stocks are expected to decrease only slightly to 6.9 million tons. The global stocks-to-use ratio could decline from 71% to 64%, which would remain much higher than average. One major source of uncertainty regarding short-term global cotton supply and use projections stems from China. The Chinese government has accumulated a national reserve of over 7 million tons in the last 14 months by buying domestic cotton from the last two crops and by purchasing foreign cotton. The cotton market knows that the China National Cotton Reserve Corporation (CNCRC) will continue buying Chinese cotton until the end of March 2013, no matter the expenses involved. However, the cotton market does not know how the CNCRC will manage the national reserve after that point. In addition, it is not clear whether and when import quotas will be opened in 2013, outside of the usual annual 894,000 tons quota linked to a 1% duty. Global Cotton Production will be Smaller in 2013/14 By Armelle Gruère, ICAC Cotton plantings for the 2013/14 season will start in February 2013 in the northern hemisphere 1. Cotton prices, after falling sharply in 2011/12, have remained 20% lower in the first four months of 2012/13 than over the same period last year. In contrast, prices of competing crops (grains and soybeans mainly), are higher than in the previous year, further reducing the attractiveness of cotton to farmers, despite the existence of government support in some countries. The Secretariat expects global cotton area to contract by 9% to 31.5 million hectares in 2012/13 and global production to decrease by 11% to 23.2 million tons, the smallest since 2009/10. A major uncertainty affecting the 2013/14 forecasts is related to the Chinese government policies. It is not clear at the present time whether, when and how the Chinese government will release some of the large stockpile of cotton it has built since 2011/12, with potential large impacts of this release on Chinese and international prices. In addition, it is not yet clear which support policy the Chinese government will adopt in 2013/14 for its cotton farmers. This article explains which factors are behind the expected decline in global cotton plantings in 2013/14, and it gives detailed production projections for the largest countries and regions, noting the uncertainties specific to some countries. 1) The northern hemisphere accounted for an estimated 87% of global production in 2011/12.

5 November-December Price ra o Price Ra os at Plan ng Time* North Hemisphere Co on rela ve to Compe ng Crops Maize Soybeans Wheat Rice * Maize, soybeans, rice: February- March average (except for 2013: September- October 2012). Wheat: previous September- October average. Factors Driving Global Cotton Plantings Down in 2013/14 Lower Farmers Returns in 2012/13 The world cotton yield is projected at 752 kg/ha in 2012/13, only slightly down from the previous season. However, cotton prices have declined significantly since April The average Cotlook A Index for the first four months of 2011/12 is 83 cents/lb, or 17% lower than the 2011/12 season average. With increasing global cotton stocks and no certainty that China will support international cotton prices until the end of the season, the 2012/13 average Cotlook A Index is expected to be at or below 80 cents per pound. In the northern hemisphere, producers are currently selling their new crop at lower prices than last year. As a consequence, farmers returns in many countries are expected to decline in 2012/13, which will discourage them from maintaining their area planted to cotton in 2013/14. Decreasing Attractiveness of Cotton Relative to Competing Crops After recovering in 2010 and in 2011, the price attractiveness of cotton relative to its main competing crops at planting time in the northern hemisphere fell sharply in 2012 and is expected to continue to decline in While international cotton prices have remained 20% lower in the first four months of 2012/13 compared to the same period last year, prices of maize, soybeans and wheat were at least 15% higher. If these price relationships hold for the next several months, then they will likely encourage a further shift away from cotton towards grains and soybeans in many countries of the northern hemisphere. Prices of sugar and rice, two crops that compete with cotton on a smaller scale than grains and soybeans, have declined since 2012/13 planting time. Agricultural Production Costs Cotton is generally more expensive to produce than soybeans, maize and wheat. It requires larger quantities of fertilizer per hectare than soybeans and wheat, and larger amounts of pesticides and fuel per hectare (if machinery is used) than soybeans, maize and wheat. On the other hand, rice and sugarcane tend to require larger quantities of inputs than cotton. Fertilizer and energy prices have declined slightly since the beginning of 2012 and are expected to remain stable or decrease in The World Bank Fertilizer Index 3 decreased from 270 in March-April 2012 to 256 in October 2012, and is expected to decline further in The World Bank s Energy Index 4 decreased from 205 in March-April 2012 to 184 in October 2012, and is expected to remain almost stable in These trends suggest that overall fertilizer and energy prices may have only a minor impact on farmers planting decisions in 2013/14. However, there may be variations in prices from country to country. The costs of planting seeds, pesticides, labor and water (in irrigated areas) also impact cotton production costs but vary across countries. Expectations in the Largest Producing Countries China Cotton area in China decreased by 10% to 5.0 million hectares in 2012/13, as a result of the decline in seedcotton prices paid to farmers in the previous season. The average yield increased slightly, and overall production is estimated down by 7% 2) World Bank Commodity Price Forecasts, September 2012, and World Bank Pink Sheet, November ) 2000 = ) 2000 = 100.

6 6 COTTON to 6.9 million tons. Despite the steady support provided by the government since September 2012 through procurement of cotton at the minimum price of 20,400 yuan per ton, seedcotton prices are slightly down from the previous season. Over the first four months of the season, the average CC Index was 18,600 yuan per ton, or 5% lower than the average over the same period last year (19,500 yuan per ton). It is not yet clear whether the Chinese government will continue its current policy of announcing a support procurement cotton price before planting time in 2013 or switch to a different support program. In any case, the lower cotton prices received this season combined with rising prices of competing crops, as well as ongoing challenges for cotton production (including labor shortages), will likely lead to a further contraction in cotton area in 2013/14. At this stage, the Secretariat expects cotton area in China to contract by 8% to 4.6 million hectares, and production to decrease by 11% to 6.1 million tons. The decline in cotton plantings could be lessened or worsened by a change in Chinese support policies for production of cotton and its competing crops. India Cotton area in India declined in 2012/13 for the first time in seven years, as a decline in cotton prices and yields in the previous season drove farmers away from cotton. The average yield is estimated at 481 kg/ha in 2012/13, down by only 2% from 2011/12 due to a late monsoon and delayed plantings. However, domestic cotton prices are down again this season. This will likely cause further contraction in cotton plantings in 2013/14. The Secretariat projects cotton area in India down by 7% to 10.9 million hectares in 2013/14. Assuming a recovery in the average yield to 511 kg/ha, cotton production is therefore expected to decline by only 1% to 5.6 million tons. United States U.S. planted cotton area recovered in 2010/11 and 2011/12 due to rising cotton prices, reaching 6 million hectares. However, falling prices of cotton combined with higher prices of corn and soybeans pushed plantings down by 16% to 5 million hectares in 2012/13. In addition to relative price levels, U.S. cotton area and production also respond to variable weather conditions, especially in the Texas-Oklahoma region, which accounts for over half of total U.S. area. Abandonment of U.S. planted area reached a record 36% in 2011/12 due to the effects of extreme drought in the southwest but fell back to 16% the following season as soil moisture improved. As a result of these fluctuations in the abandonment rate, harvested cotton area actually declined by 12% in 2011/12 and rebounded by 10% in 2012/13, to 4.2 million hectares. For 2013/14 compared to 2012/13, prospective cotton prices are lower both in absolute terms and in relation to corn and soybeans. Consequently, some planted area is likely to continue shifting to other crops. Drought is expected to persist in the southwest area and abandonment could remain above the historical average. The Secretariat expects U.S. planted cotton area to contract by 19% to 4.1 million hectares in 2013/14. Assuming a national abandonment rate of 20% harvested cotton area is forecast down by 23% to 3.3 million hectares. The average yield is expected to decrease slightly from 2012/13. As a result, U.S. cotton production is projected to fall by 26% to 2.8 million tons, the smallest crop in four years 5. Pakistan Cotton area in Pakistan has fluctuated around 3 million hectares since the mid-1990s. Cotton area was estimated at 2.9 million hectares in 2012/13, up by 4% from the previous season. However, the average yield is expected to drop by 10% after reaching a record of 819 kg/ha in the previous season. National production is estimated down by 6% to 2.1 million tons in 2012/13. The expected decrease in farmers returns from cotton production this season could drive cotton area down in Nevertheless, alternatives to cotton remain limited, sugarcane being the main competitor. At this point the Secretariat forecasts cotton area in Pakistan to decline by 5% to 2.8 million hectares in 2013/14. Assuming a slightly lower average yield, production is expected to contract by 9% to 2.0 million tons. Uzbekistan Cotton plantings in Uzbekistan have in the past been little affected by variations in international prices. Between 2000/01 and 2008/09, cotton area remained between 1.4 and 1.5 million hectares. However, in recent years the Uzbek government gradually reduced the cotton planting target to increase food crop production. Cotton area was estimated at 1.29 million hectares in 2012/13. Assuming the government continues to gradually decrease its target, the Secretariat expects cotton area to decline to 1.25 million hectares in 2013/14. The average cotton yield was under 700 kg/ha between 2009/10 and 2011/12, owing to various factors such as availability of water and weather. However, it rebounded to 778 kg/ha in 2012/13 due to favorable weather and adequate irrigation supplies. Assuming an average yield of close to 700 kg/ha in 2013/14, production in 2013/14 is projected at 870,000 tons, down by 13% from the current season. Production could be higher if snow fall this winter is abundant and provides enough water for irrigation of cotton fields. Francophone Africa After several consecutive seasons of decline, cotton production in Francophone Africa 6 has significantly recovered since 2010/11, driven by higher seedcotton prices and continued 5) If the U.S. new farm bill was finalized before March 2013, and depending on its actual cotton policies, U.S. cotton area might decline by a slightly lesser amount than projected in this article. 6) Francophone Africa includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Côte d Ivoire, Guinea, Madagascar, Mali, Niger, Senegal and Togo.

7 November-December Million Tons / /12 government subsidies for inputs. In addition, weather in the region was overall adequate for cotton production in 2012/13. Production is estimated at 1 million tons in 2012/13, up by 41% from 2011/12 and the largest in eight years. Planting intentions for 2013/14 will not be known before the second quarter of 2013, when seedcotton purchasing prices for next season are determined. These seedcotton purchasing prices might remain stable or decline, which could lead farmers to reduce their cotton plantings in Other factors will affect their planting decisions, including the higher revenues received in 2012/13, availability of input credit, timing of input delivery, and weather at planting time. There are few alternative cash crops in this region. At this stage, cotton plantings in Francophone Africa are expected to decrease by 5% to 2.4 million hectares in 2013/14. Assuming a slightly lower average yield, production is forecast down by 10% to around 900,000 tons. Mali and Burkina Faso are expected to remain the top cotton producers in Francophone Africa, accounting for half of production in the region. Turkey After recovering in 2010/11 and 2011/12, cotton area in Turkey is expected to decline by 13% in 2012/13 due to the drop in cotton prices and increased prices of competing grains (in particular maize). At this stage it is expected that cotton area will contract by 25% to 370,000 hectares and that production will fall by 30% to 457,000 tons. Rest of the Northern Hemisphere In the rest of the northern hemisphere, which accounts for less than 10% of the cotton output in this half of the world, production is expected to decrease by 10% to 1.7 million tons in 2013/14. Southern Hemisphere Planting decisions in the southern hemisphere will be made during the second semester of 2013 and will respond to commodity prices and weather conditions prevailing at that time. After reaching record levels in 2011/12, cotton area and production fell in 2012/13 due to the drop in cotton prices. At this stage, cotton area in southern hemisphere countries other than Australia is projected down by 7% to 2.9 million hectares in 2013/14. In Australia, a possible return to drought conditions could lead cotton area down more significantly. Overall, production in the southern hemisphere is expected to decrease by 8% to 2.8 million tons in 2013/14. The share of the southern hemisphere in world cotton production could remain at 12% in 2013/14. Cotton Price Volatility on the Decline By Alejandro Plastina, ICAC ICAC on Volatility Cotton prices in 2010/11 reached not only record levels but also record volatility. It was also the case that in calendar year 2010, cotton was the commodity with the highest price volatility among a list of 53 commodities including energy, metals, beverages, food, and other raw agricultural products. The ICAC Secretariat reported on several occasions about the evolution, causes, and consequences of volatility in cotton prices, as well as on strategies to increase transparency and reduce resulting uncertainties in the world cotton market. Two methodological contributions by the Secretariat to the international discussion on commodity price analysis have been (a) the disassociation of the level of prices from the volatility of prices, and (2) the questioning of the use of the adjective extreme when no normal level of volatility was defined. In order to provide robust conclusions, the Secretariat analyzed cotton prices using alternative methodologies, alternative price series (the Cotlook A Index and nearby futures prices), and alternative data frequencies (daily, weekly, and monthly prices). All methodologies implicitly assume that volatility and dispersion of prices are synonyms: a series of prices exhibits high (low) volatility if those prices are highly dispersed (concentrated) with respect to some kind of average price. The alternative methodologies used by the Secretariat to gauge volatility include (in increasing order of complexity): the relative spread, the mean absolute percentage change in prices, the coefficient of variation, the mean absolute percentage forecast error, and the standard deviation of the change in logarithmic prices. As early as July 2011, the Secretariat referred to the high volatility in 2010/11 as an aberration very unlikely to be

8 8 COTTON repeated. All updates of the studies on cotton price volatility afterward have confirmed that early projection, and the present analysis is not the exception. The goal of this article is to present an update of the analysis of cotton price volatility using three methodologies and daily quotations of the A Index. Low Volatility in 2012/13 The simplest volatility measure is the relative spread (RS), which is the difference between the highest price and the lowest price, divided by the average price over a season. Using daily quotations of the A Index, the RS in 2010/11 amounted to 96%, or more than twice the average RS in 2008/09 and 2009/10 (47%), and about three times the ten-year average RS in 2000/ /10 (32%). The RS declined to 45% in 2011/12, about half the RS in the previous season (Figure 1). Between August and November 2012, the RS amounted to 9%, which is lower than the RS observed for similar periods in 2011 and 2000/ /10. According to the RS, after peaking in 2010/11, volatility declined significantly in 2011/12 and has been low during the first four months of 2012/13. The coefficient of variation (CV) is calculated as the standard deviation of prices divided by the average price over a season. The CV is superior to the RS in the sense that it uses information on the entire distribution of prices rather than on the extreme values (highest and lowest) and the mean. 7 Using daily quotations of the A Index, the CV in 2010/11 amounted to 28%, or more than twice the CV in 2008/09 and 2009/10 (13%), and more than three times the ten-year average CV in 2000/ /10 (8%). The CV declined to 11% in 2011/12, about 40% of the CV in the previous season (Figure 2). Between August and November 2012, the CV amounted to 3%, which is similar to the CV observed for the same period in 2011 and lower than the average for the same periods over 2000/ /10. According to the CV, after peaking in 2010/11, volatility declined significantly in 2011/12 and has been low during the first four months of 2012/13. The mean absolute percentage forecast error (MAPFE) measures the average percentage difference between daily forecasts and the realized price over the season. The forecast is produced using a constant and a trend over the previous 20 weekdays. The MAPFE measures volatility around a monthly trend in prices, and not around a simple average of prices like the RS and the CV. The MAPFE is more meaningful than the CV and RS during periods of sustained increases or declines in prices. Technically, the goodness of fit of the MAPFE is measured by the average coefficient of determination (R-square) of all the regressions used to produce forecasts during the season. The MAPFE is an appropriate tool to measure volatility when the average R-square is high, while a low R-square indicates that short term trends are not sufficiently present in the data and the method is inappropriate to measure volatility. For example, while 1986/87 was the second highest most volatile season on track according to the RS (figure 1) and the CV (figure 2), it was a season of low volatility according to the MAPFE (figure 3), since during that season cotton prices increased from 36 cents per pound to 87 cents per pound in three clear price run-ups (i.e., three clear short term trends). In 2010/11, the MAPFE amounted to 3.6%, the highest on record and about two and a half times the average MAPFE over 2000/ /10. The goodness of fit of the MAPFE for 2010/11 amounted to 0.58, which compares favorably to the average R-squares for 2002/ /10 (ranging from 0.41 to 0.55), but it is lower than the average R-squares for 2000/ /02 (0.75 and 0.68, respectively). In 2011/12, the MAPFE declined to 2.0% with an average R-square of Finally, 7) If a series of prices is very concentrated with respect to its mean, but one price is very high (or very low), the RS will show high volatility while the CV will show low volatility.

9 November-December between August and November 2012, the MAPFE amounted to 1.7% with an average R-square of According to the MAPFE, volatility in 2010/11 was record high, but it has declined ever since and short term trends (downward or upward) in prices have become less frequent. All volatility measures suggest that cotton prices seem to be stabilizing in the current season and returning to more normal patterns of variability around the mean value. An important factor behind the decline in volatility after 2010/11 has been the stabilizing effect on international cotton prices of the set of policies implemented by the Chinese government to support domestic cotton production. In its absence, international cotton prices would have likely declined to substantially lower levels than the current 80 cents per pound floor, pushing volatility up. The implementation of a minimum price policy for cotton in China provides some assurance against high volatility to the downside of prices, which is the major risk in the short and medium term (given that world demand for cotton is unlikely to explode in the near future and world stocks are very high). One possible scenario in which minimum prices in China would not be able to contain a slump in international cotton prices is that of deteriorating global economic conditions to the point of generating a double dip world recession. So far, no agency predicts another world recession in the near term, but many are slashing their growth projections for most countries and projecting that several industrialized countries will face economic recession in However, if the global economic situation stabilizes and cotton consumption prospects improve, then volatility in 2012/13 could be expected to remain low. References: Gruère. A. and A.. Plastina Cotton Price Trends in 2011/12, Cotton: Review of the World Situation 65 (6): 3-8. Gruère, A., Plastina, A., and T. Townsend Cotton Price Trends in 2010/11, Cotton: Review of the World Situation 64 (6): 3-6. Plastina, A Price Volatility for Cotton and Other Commodities, Cotton: Review of the World Situation 64 (2): Plastina, A High Volatility: Aberration or New Paradigm? Cotton Outlook Special Edition: Argentina, p Plastina, A Update on Cotton Price Volatility, Cotton: Review of the World Situation 65 (2): 5-7. Plastina, A., Gruère, A., and A. Guitchounts Managing the Impacts of Volatile Cotton Prices, Cotton: Review of the World Situation 65 (1): Plastina, A., and T. Townsend Price Volatility in the World Cotton Market: Causes, Impacts, and Mitigation, Invited paper at USDA Agricultural Outlook Forum, Washington, DC, February 24. CHINA CONTINUES TO BUILD ITS STATE RESERVE Andrei Guitchounts, ICAC China maintains a strategic reserve of cotton, serving as a national buffer stock. The China National Cotton Reserve Corporation (CNCRC) is the agency that manages the state reserve. China releases cotton to the market from the reserve through a system of auctions when there is a shortage, and the government replenishes the reserve when there is an abundance of supplies, thus supporting prices. During the past decade, large purchases into the reserve were made in 2008/09 when 2.7 million tons were acquired. Most of the reserve cotton was sold to mills in 2008/09 (1.2 million tons), in 2009/10 (1.4 million tons) and in 2010/11 (1 million tons). Release of the reserves to domestic mills reduces the need for imports and limits growth in world cotton trade, while purchases for the reserve boost domestic prices in China and increase world cotton trade. In 2011/12 China implemented a minimum cotton support price combined with the rebuilding of the national reserve. The state reserve procurement price for 2011/12 was set at 19,800 yuan per ton for Type 328 (141 US cents per pound at the end of July 2012). China purchased 3.1 million tons of domestic cotton and about one million tons of imported cotton during 2011/12 for the state reserve. This resulted in a significant increase in world imports in 2011/12 and supported domestic and international prices. For 2012/13, the government procurement price was

10 10 COTTON Table 1: China, Government Purchases for the State Reserve Purchases Purchase price Cotlook A Index CC Index price Sales 000 Tons Yuan/ton U.S. cents/lb** U.S. cents/lb Yuan/ton 000 Tons 2002/ ,812 1, / , / , , / , / , , / , , /09 2,724 12, ,134 1, / ,295 1, / , /12 3,130 19, , /13* 3,485 20, , * Up to the end of November ** As of December 31 of each season. increased to 20,400 yuan per ton (147 US cents per pound in mid-november 2012) and between September and November 2012, China purchased 3.5 million tons of the 2012/13 crop. There is no pre-defined limit on how much cotton China will buy for the reserve. This suggests that the size of the national cotton reserve is already above 7 million tons and could increase further. In September 2012, China auctioned 500,000 tons of 2011/12 cotton from the reserve to mills. This limited release from the reserve was temporary and was aimed at easing the supply situation during September, before the arrival of the new crop. The announced minimum auction price was 18,500 yuan per ton (133 US cents per pound as of September 2012). Actual sales were made at prices slightly higher and close to the CC Index (domestic price in China), which averaged 134 US cents per pound during September In September 2012, Mr. Zhang Xianbin, Director of Economic and Trade Department of the National Development and Reform Commission announced that China would not issue additional import quotas this year and would not auction cotton from the reserve after September. At the same time China continues applying border protection measures, controlling cotton import volumes and values, with an effective import tariff of 40% on cotton imported without a quota. The policy by the Government of China of maintaining a minimum support price for farmers of approximately US$1.47 per pound (while international prices are currently close to 80 US cents per pound), and enforcing the minimum price with import quotas and a high tariff, ensures that mill use of cotton in China will continue to suffer. This also leads to a sharp increase in imports of cotton yarn by China. Purchases of cotton by China into the reserve also support international prices at a time of record world stocks. At some point it is likely that cotton from the state reserves will be auctioned in bulk to the spinning mills in China. That could undermine domestic and international cotton prices. Where s the WAY out for China s Textile Industry? By Xi Jin, Manager of International Cooperation, China National Cotton Information Center (CNCIC) Since its birth in Britain in the 20th century, the modern textile manufacturing industry has moved to the United States, Japan, South Korea and China. History suggests that the textile manufacturing industry boosts the economy of a nation for a certain period of time and then moves to another place to take advantage of lower production costs. China is not an exception. Since China joined the World Trade Organization (WTO) in 2001, its textile manufacturing industry has experienced fast growth. However, to reduce production costs, Chinese textile manufacturing has been moving from coastal areas to the west of the country and then to foreign countries. With the fast progress of urbanization in recent years, production costs in the west part of China have risen at high speed. As a result, more and more Chinese textile mills have to move to other countries to lower their production costs. Such a phenomenon indicates that China s textile manufacturing industry no longer has a competitive advantage in terms of production costs. Trends in consumption of cotton, the major raw material of textile production in China, clearly illustrate that it peaked in 2006/07. According to the estimates of the China National Market Monitoring System (NCMMS), cotton consumption increased from 5.19 million tons in 2000/01 to million tons in 2006/07 and then decreased to 7.91 million tons in 2012/13.

11 November-December Besides production costs, a lot of other problems also hinder the expansion of China s cotton textile manufacturing industry: Decrease of Demand in Foreign Markets The demand from developed countries used to be the main force driving textile production in China. However, the economic condition of those countries has been weak since the financial crisis, which affects their demand for textile products seriously. Indeed, exports of textile products to developing countries are increasing, but they cannot yet make up for the decline from developed countries. Limited Demand in Domestic Market The price of most things has been rising in China in recent years. The inelastic demand for housing, medical service, education and food handicaps the demand for textile products seriously. Competition With Other Countries The competition between China and other textile manufacturing countries becomes stronger and stronger. In comparison with China, those countries have obvious advantages in terms of production costs (labor cost and raw material cost, particularly cotton). Furthermore, some Asian countries benefit from favorable trade policies with developed countries. In markets in both developed and developing countries, rising textile producing countries are gaining market share at the expense of Chinese producers. Meanwhile, more and more Chinese textile mills are moving to those Asian countries. Currency Appreciation Renmibi (RMB) appreciation started in 2006 and has hurt the competitiveness of China-made textile products in the world market. It is no coincidence that the decrease in cotton consumption in China illustrated above occurred at the same time as the RMB appreciation. Constant Cotton Reserve Procurement China purchased 3.13 million tons of cotton for its national reserve at the price of Chinese yuan (CNY) 19,800 per ton in 2011/12 (equivalent to U.S. 143 cents/lb). The reserve procurement program in 2012/13 will take place from September 2012 to March As of November 22, 2012, China had purchased 2.65 million tons of cotton for its reserve at the price of CNY 20,400 per ton (equivalent to U.S. 147 cents/lb). Based on current progress, it is possible for the government to procure million tons of cotton for its national reserve in 2012/13. Thus, China may build up a total of million tons of cotton reserves within two seasons, after deducting 0.49 million tons sold from the reserve in September The huge cotton reserve bought at high prices drives up the price of cotton for Chinese textile mills and thus accelerates the transfer of their activities to other countries. In consideration of all above-mentioned factors, China s textile industry must move toward the production of highervalued textile and apparel products, following in the footsteps of Japan, Korea and other countries. It should be noted that the most valuable things in the entire textile value chain, i.e. brands, technology and retailing, are still concentrated in the developed countries, although the textile manufacturing industry has moved out of those countries. It s time for China to boost the development of brands, technology and retailing. Looking into the future, the textile products made in China will be of higher value. A structural change of cotton consumption in China will take place, i.e. lower in quantity but higher in quality. This strategy seems to be the only way forward.

12 12 COTTON Trends in Cotton Yarn Manufacturing in Southeast Asia By Robert Miller, Director, Northeast and Southeast Asia, Cotton Council International High levels of efficiency, competitive energy costs, regional integration, economic and political stability, a patchwork of free trade agreements and unfettered access to raw materials have facilitated the textile and apparel complex in Southeast Asia to develop as a strong sourcing alternative to China. While the past two years have been some of the worst on record in terms of profitability, the future remains bright. With an eye towards the short and medium term, there are a few distinct trends in yarn and textile manufacturing to consider. A Return to Stability Unparalleled volatility in cotton prices during 2010 and 2011 translated into chaos for many major yarn manufacturers in the region, particularly in Thailand, Vietnam and Indonesia. Tremendous profits while the price of cotton rose to record levels turned to significant losses during the corresponding drop, and for many that translated to breach of contract and subsequent default action. Many smaller enterprises have not survived. Even now, many mills are struggling to sell lower count yarns at a profit. Emphasis remains on moving stock. However, if cotton prices remain stable during 2012 and 2013 and the supply-chain digests the yarns manufactured with higher priced cotton, we can expect a gradual return to profitability. Many textile mills are moving forward with plans on modernizing, and investment continues for new spindles, particularly in Vietnam. This return to profitability is also being facilitated and expedited by current market conditions in China. China The trend, even before the period of volatility, for sourcing companies and retailers was to rely primarily on China as a manufacturing base but to also develop a long-term viable alternative. A stronger Renminbi and growing domestic consumer market, along with tightening social compliance costs, lack of labor, and restricted access to raw materials in China have sent both domestic and global companies to search for lower cost manufacturing bases. Many have stated that current Chinese cotton policies have a detrimental effect on mills ability to purchase competitively priced raw materials, and in reality provide little benefit to domestic cotton producers that it is designed to support. Minimum guaranteed price purchases to build stocks have created uncertainty throughout the world and will over the long-term erode competitiveness for Chinese yarn manufacturing. However, China s advantage remains in scale. The longterm trend continues towards supplying a growing domestic population, increasing efficiency and moving up the value chain. An interesting dynamic for the near future will be continued Chinese investment in Southeast Asia, particularly in Vietnam, Cambodia and Myanmar. Chinese companies are embracing the model developed by Japan and Korea of moving and investing in spindles offshore. In the world of yarn manufacturing, we will not necessarily see a move towards Made in China, but Made by China. Table 1. Spinning Machinery in Southeast Asia Installed Capacity in 2010 Installed Capacity in 2010 Cumulative Shipments count as % of world total as % of installed capacity Spindles Spindles Spindles O-E Rotors O-E Rotors O-E Rotors Short Staple Short Staple Short Staple China 117,860,720 2,521, Indonesia 8,499, , Myanmar 356,680 2, Thailand 3,769,476 50, Vietnam 2,176,232 22, World 244,642,380 8,233, Source: Author s calculations based on the 2010 International Textile Machinery Shipment Statistics, ITMF. Note: Installed capacity in 2010 was estimated as the sum of the reported installed capacity for 2009 and 2010 shipments.

13 November-December Regional Dynamics Major countries in ASEAN (the Association of Southeast Asian Nations) for textile and garment manufacturing include Indonesia, Thailand, Vietnam, the Philippines and Malaysia with cut-and-sew operations only in Cambodia, Laos and now Myanmar. Thailand With the minimum wage set to increase in Thailand in 2013 from US$7 to US$10/day, the garment industry has begun the shift to moving cut-and-sew operations to bordering lower wage countries including Laos (US$3), Cambodia (US$2) and Myanmar (US$1). Prices for lower count yarns in Thailand remain uncompetitive, so expect Thai operations to continue to move up the value chain towards higher efficiency and higher quality yarns and fabrics. Thailand currently maintains around 5.5 million spindles with one million people employed in the textile and apparel industry. However, many are pessimistic about growth in the spinning sector in Thailand. Some smaller operations that do not replace older spindles may close. Most investment in Thailand will be upgrading spindles and adding automation to existing mills. Although trend lines and market conditions point to gradual declines, many believe that cotton consumption will stabilize and declines will be offset with increases in productivity. Indonesia With a large population base of 235 million people and 1.5 million working in the textile industry alone, Indonesia will continue to remain competitive in all facets of textile manufacturing. There are currently around 8 million spindles in Indonesia and it is still the largest spinner in the region. Indonesia has slightly higher electricity costs at $0.08/ kwh, compared to Vietnam ($0.07), Pakistan ($0.066) and Bangladesh ($0.03). Development in Indonesia in the spinning industry in the near to mid-term future will be replacing old machinery and increasing productivity in current operations. Yarn production in Indonesia has been relatively unchanged in the past ten years. There will be continued investment in upgrading spindles but investment for new facilities in Southeast Asia seems to be focused solely on Vietnam. Vietnam Vietnam has the greatest potential for expansion in the region. From 2010 to 2012, Vietnam increased its spindles from 3.8 million to currently over 5 million. If the Trans- Pacific Strategic Economic Partnership (TPP) is implemented with a yarn forward inclusion estimates are that spindles could double in three years following implementation. Even without TPP passage, many are bullish about widespread textile development. The challenge for Vietnam will be to fill the gap in knit and woven production. There are currently at least ten feasibility studies underway for investment in fabric manufacturing and several large-scale developments have moved forward. Myanmar With President Obama s recent historic visit, all eyes are on Myanmar. The announcement of the Burmese Freedom and Democracy Act now allows American companies to import Burmese products including all textiles and apparel. A population of 60 million, arable land and an appetite for development are ingredients for development for Myanmar. The pace of liberalization has been surprising to many. A military junta that is nearly universally despised, and a leaderin-waiting in Aung San Suu Kyi who is nearly universally admired, provides potential for a fragile transition. Provided that liberalization continues and control is wrested from the military without conflict, there is significant potential for Myanmar. What many may not know about Myanmar is there is already a small domestic textile industry. Most is devoted to longyi production, the traditional dress still worn by most Burmese. Power supply is unstable, and machinery is ancient. Watching current yarn and fabric manufacturing is an exercise in time travel. In garment manufacturing, productivity is inefficient and social compliance is seriously lacking. Myanmar has a long dry growing season interrupted by a monsoon. There is some cotton production, harvested twice a year before and after the monsoon. It is primitive and yields are low but long-term potential exists. Rice and chili peppers are the major competing crops. The limiting factor for development is political and economic reform. In the short-term it will be a growing destination for cut-and-sew operations in spite of the current state of the industry. In the medium to long-term, a vibrant textile industry from spinning through to garment could exist. ASEAN Integration and Liberalization Despite a massive geographical area (4.46 million km²) and large and diverse population (600 million), ASEAN countries are moving towards economic integration. The ASEAN Economic Community (AEC) will go into effect on January 2015 and create a single market with free flow of goods, investment and people. Currently ASEAN has trading agreements with China, Japan, Korea, India, Australia and New Zealand. In addition, an FTA with the EU is under consideration. The reality is that ASEAN remains a collection of countries but recent improvements have been made to simplify and expedite movement of textile products between borders. Return to Cotton There was a shift from pure cotton to cotton blends in the region as the gap between the price of cotton and polyester widened. Even with the return to historic norms, there is still limited profitability in 100% cotton yarns at this time in Southeast Asia. With stable cotton prices and demand destruction at retail with blended cotton/poly apparel, spinning mills believe the future lies in 100% cotton yarns. Industry

14 14 COTTON leadership believes that with efficient operations, a free trade framework and access to raw materials, pure cotton yarns have a competitive advantage in Southeast Asia. Current investments, particularly in Vietnam reinforce those thoughts. Conclusions and Challenges The major challenge for Southeast Asia to develop into a true sourcing hub will be to integrate the supply chain across borders, offer full package solutions and facilitate communication between manufacturers of yarns, fabrics and garments. Cotton yarn manufacturing in an era of renewed cotton price stability is bright with the greatest development in Indonesia and Vietnam Source: 2012 World Textile Demand, ICAC. Inefficiency and Atrophy in China s Spinning Sector Provide Opportunities for Others By Robert P. Antoshak, Managing Director, Olah Inc. Meet My Friend In The Business While in Shanghai for one of our Kingpins denim shows recently, I met with a friend of mine to discuss the current state of the Chinese textile industry. Although he was generally positive about the overall textile industry in China, our conversation turned to the spinning sector -- which he held in low regard. He explained to me that labor was the largest single cost for China s spinning sector today. I found that interesting, but puzzling. Although there have been numerous press reports about rising costs in China, I thought that the cost of cotton had the highest impact on the cost of Chinese yarn. My friend corrected me: The price of cotton or polyester is important, but the cost of labor is even more essential to the final cost of Chinese yarn. In ten years, the average worker in a Chinese textile mill has seen his salary go up from 250 RMB per month to more than 2,500 RMB per month, but what makes this even worse for spinners is that they employ way too many people. Their efficiency is very bad. As I reflected upon my friend s observations, I began to understand his point. There may have been a ten-fold increase in the cost of labor, but when I considered the industry s penchant for over-employment and over-capacity, my friend s observation became prescient. Government policies play a role as full employment continues to be a key goal of Chinese industrial planners. In fact, the more I thought about it, the more it made sense to me. I have visited dozens of spinners throughout China over the years and found the same things in common from mill to mill -- many spinning frames were idle and lots of workers were standing around with little to do. I remember one mill in particular, where the workers moved the same boxes in fork trucks back and forth from one side of the mill to the other and back again for hours every day. So much for efficient employment! I guess it is fair to say that Chinese spinners are at a disadvantage to mills elsewhere, but there is more to the story. The Textile World Goes The Way Of China To discuss the global textile market is to discuss China s textile industry. China s industry is such a large portion of the global market that, plainly put, the global industry goes the way of China. If China s textile industry struggles, so will global textiles and all suppliers into that industrial chain, but this will also provide opportunities and challenges for producers elsewhere. Chinese companies understand competitive pressures better than any other company; however, government employment policy saddles spinners with excessive overhead costs and, to make matters even worse, cotton policy skews domestic production, keeps domestic prices artificially high, and limits the amount of cotton that may be imported at any one time. In doing so, Chinese government policy positions the fortunes of cotton farmers opposite those of spinners. What results is an inefficient, barely profitable industry (Figure 1). The local spinning sector is large, but its problems make it vulnerable to more nimble producers. To place China s industry in perspective, it is the dominant producer of yarn in the world today. Whether measured in terms of short or long staple capacity, or in terms of open-end rotors, the Chinese industry accounts for at least a quarter of global capacity. A vestige of state-run missteps, China s yarn sector has struggled to upgrade the quality of its production and to price its products more competitively. Over-capacity continues to plague the sector,