China: Reserve Policy Dominated Market and Attracted Attention

Trade & Policy

China: Reserve Policy Dominated Market and Attracted Attention

During the year of 2013, China’s cotton demand was sluggish due to weak textile and apparel consumption worldwide, according to China Cotton Association’s annual review of 2013. Domestic cotton prices in China were supported by the government’s reserve policy.

Most of the seasonal yield went to state reserve stock and the release of reserve cotton together with imported cotton were the major purchase channel for mills. Cotton spot market seldom witnessed transaction. On September 1, 2013, the new cotton quality system was implemented, China Cotton Alarm System adjusted its indexes accordingly, and the new CC Index was issued in October and settled at 19,534 Yuan per ton by the end of the year, 61 Yuan up than this first day issuance.

Reserve purchase

By the end of March, reserve purchase of 2012/13 season closed, and the accumulative buying was 6.5 million tons, about 90% of the seasonal yield, the report states. In April, Temporary Cotton Reserve Purchase Plain in 2013/14 season was announced by the government, for reserve purchase, the warehouse delivery price for standard grade lint was 20,400 Yuan per ton, and new national cotton quality standard was implied for the reserve cotton quality requirements. In September, the 2013/14 reserve purchase commenced and 4.85 million ton was bought by reserve till 31 December. Regulations and punitive strategies were set for frauds in reserve cotton transaction by government departments concerned.

Reserve release

To meet textile demand, the first round of reserve release started from January to July, 2013, and 3.72 million tons of cotton was sold with more than 70% of domestic cotton. On November 28, reserve cotton auction launched for the second round, and by December 31, 2,570,000 tons was sold with transaction percentage of 47.77% due to old season resources.

Impact of reserve policy

The reserve policy worked towards protecting cotton growers’ interest; but also caused large price gap between foreign and domestic cotton prices, and reduced market activity. The rising cost of textiles also drove out a large number of orders to Southeast Asia, and some mills chose to import foreign yarn directly at lower prices, which buoyed cotton yarn imports in the past two years. In recent central rural work meeting, government planned to adjust current reserve policy and make trials for target price subsidy on soybean and cotton, and the details of the new policy are yet to announce.

Last week (30th December – 3rd January), CC Index 3128B settled at 19,534 Yuan per ton, 1 Yuan down over the week. Currently, seed cotton procurement was generally closed. According to CCA cotton processing industry branch, weekly average price for Xinjiang 3128 equivalent seed cotton was 8.7 Yuan per kilo, 0.1 Yuan up over the week; inland 3128 was 8.5 Yuan per kilo, 0.01 Yuan up over the week.

By January 3, reserve purchase of the season accumulated to 5,016,540 tons, comprising of 1,977,200 tons of Xinjiang cotton and 1,345,890 tons of inland cotton and 1,693,450 tons via large key enterprises. Reserve release auction offered 585,800 tons for sale, while the actual transaction was 280,400 tons, with 214,600 tons of domestic cotton at 41.3% of transaction percentage, and 65,800 tons of imported cotton at rate of 98.9%.

As for import cotton price, by weekend FC Index settled at 93.82 cent/lb., 0.64 cent up over the week.