Textile mills and trading firms in China, the world's top cotton consumer, are renegotiating prices and deferring their cotton import contracts amid widespread defaults following a slump in US prices and slackening demand, traders said on Friday. Chinese buyers have already cancelled 603,700 bales, or 136,919 tonnes, of US cotton last week, the US Department of Agriculture (USDA) said in its weekly report issued on Thursday.
A sustained rebound in US cotton prices could help stem the recent wave of contract cancellations, but poor demand and low profitability that have already led to the shutdown of many small textile mills in China make that unlikely. "The defaults are not only restricted to US cotton," said one manager with an international trading house who declined to be identified in the absence of authorisation to speak to the media. "Some are also defaulting from Australia, India and Brazil. Falling global prices have led buyers to default because some mills had booked cargoes at 90 cents/lb or even higher."
Benchmark New York cotton has lost about 30 percent so far this year to trade at 69.55 cents per lb, but is off a three-year low of $64.61 cents per lb touched early in June. Prices edged up slightly this week in expectation of weak cotton acreage estimates by the US Department of Agriculture due on Friday.
"Some are deferring their cargoes to 2012/13. Suppliers like us are really frustrated with these mills," said the manager. "They tell us we are not taking the cotton because they cannot open letters of credit and are shutting down their plants." Traders said many of the troubled mills were in Shandong province, the country's largest textile exporting area. "Some are deferring the shipment indefinitely. Demand is just too bad, many small mills have already shut down while those still in operation are running at a lower capacity," said another trading manager with an international supplier that is also struggling with defaults. He asked not to be identified as he was not authorised to speak publicly.
WAREHOUSES SWOLLEN Swollen stockpiles in Chinese bonded warehouses, which are exempt from the country's 17 percent value added tax, are also a factor in prompting the widespread defaults. Many trading firms had ramped up imports this year hoping to profit from an attractive arbitrage that made overseas prices 40 percent cheaper than domestic supplies. But they were wrongfooted by a further slump in Chinese demand, while Beijing's reluctance to issue more import quotas leaves the firms stranded with the stocks.
"Buyers of this cotton do not have enough quotas. Quotas have been traded as high as 3,500 yuan per tonne, which would make imports more expensive than domestic cotton," said the first trading manager. Traders estimated total bonded cotton stocks in China to be around 700,00 to 800,000 tonnes, with Shandong holding around 500,000 tonnes.
"Warehouses are swollen with cotton. Consumption is too slow to digest the stocks as many mills are running at 60 percent of their production due to slow export orders," said a manager who trades cotton at the Qingdao bonded warehouse, who also spoke on condition of anonymity because she was not permitted to speak to the media.
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