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Tight cotton supply squeezes already thin margins

A shortfall in domestic output and India's export ban are curtailing China's fiber stockpile, resulting in higher fabric and finished product prices, and reduced profit for suppliers.

China's apparel, textiles and related industries are bracing for yet another difficult year. Exports may be on the rebound, but an imminent shortage in local and overseas cotton supply is threatening to curb growth.

Lackluster demand forced a reduction in cotton acreage in 2009. The Cotton Research Institute of the Chinese Academy of Agricultural Sciences Institute estimates total planted area in the September 2009 to August 2010 period will go down 3.5 percent to 4.5 to 4.8 million hectares.

With the global economy picking up, demand for the natural fiber began increasing as well. China, however, was not the only cotton producer that slashed output in the 2008/2009. Nearly all major sources of the fiber, including the US, planted fewer seeds to cut down on costs or as a result of unfavorable weather conditions, pulling down global cotton inventory.

Although China tried to boost output this year, bad weather is preventing farmers from augmenting the low stockpile. Harvest is estimated to be delayed by 10 to 15 days.

The National Bureau of Statistics revealed the country's cotton output for 2009/2010 will reach 6.4 million tons, down by 1 million tons from the previous year.

The United States Department of Agriculture, meanwhile, pegs current global inventory at only 1.1 million tons. Although this is the lowest it has been over the past seven years, output for 2010/2011 is projected to be even less than that.

Andrew Dong, general manager assistant and director of the research institute at Jinshi Futures Co. Ltd, said the country's consumption for this year would be about 10.5 million tons, 39 percent higher than current supply. The deficit is usually imported, primarily from the US and India. For 2008/2009, China procured 630,000 tons from the US and 320,000 tons from India, accounting for 41 and 21 percent of its total cotton imports.

In December, China's National Development and Reform Committee released a cotton import quota of 1.89 million tons. The NDRC set out an additional quota of 800,000 tons this month, bringing the total allowable imports for 2009/2010 to approximately 2.7 million tons.

But India stopped export registration for raw cotton last month. Even registered cotton that had yet to be shipped out was affected by the overseas sales ban. This restriction was lifted only on May 23, but a license has to be obtained before the fiber can be exported.

For these reasons, Dong estimates China would probably have a cotton shortage by Q3 2010. Although the deficit will last for two months, at most, costs are expected to continue rising throughout the period.

The information department director of the China Cotton Association, Ma Aifang has a more optimistic view about the cotton supply. Ma believes the country would not have a shortage this year. If the volume from India and the US is insufficient, China could still import from other sources such Australia, Brazil, West and Central Africa, and Central Asia.

If there is still a shortage despite these alternative sources, yarn can be procured instead.

Escalating future, spot prices

India implemented its export ban on cotton on April 19. The next day, the New York Board of Trade cotton futures rose by about 4 percent. July cotton futures closed at 84.60 cents per pound, while those for May ended at 82.85.

In the same day, the Cotlook Indices, a major parameter for international cotton spot prices, also increased. The Cotlook Far East A Index increased 115 points, settling at 87.30 cents per pound.

Even local spot prices climbed up. Four days after the ban was implemented, domestic grade 328 cotton reached 16,354 yuan ($2,392) per ton, up 0.34 percent from the previous week.

On May 19, November futures advanced 1.12 percent and closed at 17,030 yuan ($2,494) per ton. This also represents a 7 percent jump over a two-week period.

More expensive fabrics, finished goods

The upward trend in cotton spot and future prices has a substantial impact on China's manufacturers of apparel, textiles and related products.

Compared with late last year, quotes for different kinds of denim and cotton gray fabrics that Shenzhen Huacun Textile Co. Ltd sources are now about 10 percent higher. The company manufactures men's, women's and children's apparel.

Cotton fabrics purchased by bedding supplier Qingdao Riches Imp. & Exp. Co. Ltd are 15 percent more expensive than what they were six months ago.

Hangzhou Xiaoshan Huafeng Feather & Down Products Co. Ltd raised bedding prices 10 percent because the fabrics it procures from Shandong province now cost 25 percent more than they did less than six months ago.

Adjusting prices upward, however, is not always a viable option for suppliers. Shenzhen Huacun said some buyers will not accept higher quotes especially for repeat orders.

Home textiles, yarns, fabrics and apparel maker Ningbo Veken Elite Group Co. Ltd works with its buyers to reach an acceptable compromise on materials and prices.

Most manufacturers also negotiate with their long-term fabric suppliers to lower costs. Others take an indirect approach to reducing expenses by commissioning their skilled workers to train new hires to boost efficiency and minimize fabric wastage.

ODM-oriented companies such as apparel company Guangzhou Textiles Holdings Ltd, however, are in a better position to deal with higher cotton costs. As they come up with their own designs, renderings can be improved or tweaked for optimum fabric consumption.

But for businesses that cannot enforce any of these options, they have no choice but to absorb all additional costs and accept thinner margins.

 

This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

 

About the Author

Global Sources is a leading business-to-business media company and a primary facilitator of trade with China manufacturers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

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