After three years of severe volatility, it appears that world cotton prices have finally begun to find some semblance of stability. In the two years since the global pandemic, world prices hit a 12-year low of $1.40 per kg, and an 11-year high of $3.61 per kg, finally settling in the vicinity of $2.25 per kg in recent months. But the hard-won stability hasn’t come cheap, as the current price is trading at 25 percent premium over pre-Covid LT average.
Locally, the price effect has so far not seemed to have impacted export earnings, which have declined despite fetching higher unit prices during 6MFY23 over the corresponding period last year. Over the following months, volume exported could witness an improvement as prices continue to correct downwards; however, it is hard to comment whether the net revenue impact of higher demand at weaker prices would be positive or not.
Either way, the new normal in world cotton prices has had a very stark impact on global fiber demand. According to USDA, world cotton consumption is now projected at a 9-year low (excluding pandemic year), and at 10 percent lower than peak cotton consumption of 123 million bales (of 217kg), first achieved in 2007, and reached only twice since. In fact, over the past decade, world cotton demand has averaged at 115 million bales, even as prices in the international market averaged at $1.80 per kg, and never above $2.25 per kg.
Demand slowdown is already reflected in the stock build up globally, with ending stock to use ratio for the current marketing year projected at its highest since 2014 (minus pandemic year 2020). Ideally, a strong enough slowdown in demand should push world prices to ease further. Unfortunately that may be overly simplistic assumption.
The assumption behind global inventory buildup misses one key element of the full picture: China. The world’s largest cotton producer is single-handedly responsible for at least one-quarter of global output, and one-third of global consumption. However, a ban by USA on textile products made from cotton originating from Xinjiang region of China (that came into effect last year) has basically cut off a sizable chunk of raw material from global supply chain.
Until recently, the region was responsible for almost 90 percent of Chinese cotton production, feeding into the global value chain of textile and garments manufacturing that produced goods with USA as their ultimate destination. The Xinjiang ban has effectively forced textiles and garments exporting countries such as Viet Nam, Bangladesh, Turkey, and Pakistan to look for raw material (either cotton fiber or yarn and cloth) that originates from non-Chinese origins. And although Chinese import of cotton has shrunk as a result, the reduction isn’t nearly enough to compensate for the forgone raw material supply from China. As a result, the tradable surplus of cotton (or other intermediate products such as yarn or cloth) in the global market has diminished, keeping prices at an elevated level. Meanwhile, high global energy prices – both Brent and gas – have ensured that global PET prices remain prohibitively high, in turn elevating prices of cotton substitutes such as polyester or synthetic fibers.
Given that the supply side shocks to world cotton market have endured even as the impact of pandemic has faded globally, it may be a while before world cotton prices return to pre-Covid territory. At least not without a hard-hitting global recession of levels similar to GFC 2008-09. Those hoping for lower cotton prices should be careful of what they wish for!
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