Textile mills turn to buy cheaper Indian cotton yarn to cut costs
Affected by adverse weather, a reduced planting area and lower Indian cotton prices, China's cotton output is expected to drop sharply this year compared with 2012, which will result in increased cotton imports.
Lu Huaiyu, vice-president of the China Cotton Association, said that the cold weather during the cotton seeding season, heavy rains and then a drought in major cotton-planting regions such as Hunan, Anhui, and Jiangsu provinces between June and August have severely cut the nation's cotton production.
The Ministry of Agriculture forecast that the nation's cotton output will be around 6.3 million metric tons in 2013, down 540,000 tons from last year's figure.
Anhui's agricultural authorities estimated that the province's cotton output decreased 17 percent this year and that cotton quality is lower than in 2012, mainly due to the heavy rains.
China has 13 major cotton-planting provinces and autonomous regions, and nearly half of them were hit by adverse weather conditions this year.
Lu said that cheaper Indian cotton prices and shrinking cotton farmland are another two important factors behind the country's lower cotton output.
The Chinese government introduced a floor for cotton prices in 2011 to ensure that cotton farmers get a fair income. Domestic cotton prices are now between 18,000 and 18,500 yuan ($2,950 to $3,032) a ton, while Indian cotton is priced between 17,200 and 17,600 yuan a ton in the Chinese market after customs clearance, according to the Beijing-based China National Cotton Exchange, the country's biggest cotton trading platform.
Lu said that China's textile mills are buying cheaper Indian cotton to reduce their raw material costs and tackle the rising costs of labor, energy prices and logistics services.
And many Chinese textile companies in Zhejiang, Shandong and Jiangsu provinces have also started to order cotton yarn from India.
Companies save on customs fees when they buy Indian cotton yarn compared with raw cotton, because no tariffs are charged for imported cotton yarn. Meanwhile, Chinese textile companies have to pay a 13 percent value added tax if they buy raw cotton from domestic producers.
Since January, most of the raw material used by China's textile mills came from the country's reserves and from cotton imports. Supply from the reserves reached 3.72 million tons from January to the end of July, while the amount of imported cotton bought by textile mills hit 3.37 million tons from January to October. India and the United States are the biggest exporters to the Chinese market.
Due to increased competition after 2010, the income of Chinese cotton farmers has decreased and many of them started planting rice and wheat, which brings them higher government subsidies than cotton.
Lu said that about 4.2 million mu (280,000 hectares) of China's cotton farmland has been turned into grain or vegetable farmland this year. The country's total cotton-planting area now stands at 66 million mu.
Ding Lixin, a researcher at the Chinese Academy of Agricultural Sciences in Beijing, said it's too early to assess whether China's cotton output will see a significant drop as the nation's cotton policies are based on the import quota and the government reserves
"To prevent uncertainty in the market, China will use its abundant cotton reserves to meet market demand if the country's cotton-planting regions report a certain level of output losses," Ding said. "Cotton prices surely won't become a big concern for Chinese garment and textile factory owners."
With 9.6 million tons of cotton reserves, which represent half of global stocks, China began to sell cotton from its reserves on Nov 28 and will start auctions that will run until August 2014.
The country's cotton reserves are expected to increase to 11.4 million tons in 2014, up by almost 2 million tons from the stockpile earlier this year. The country will hold nearly 60 percent of the world's stocks then, according to a report by the US-based International Cotton Advisory Committee.
