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Editorial: Will sales from the Chinese cotton stockpile drive down world prices?
published in Issue 179, April 2016
The global textile industry faces a period of uncertainty as China starts to auction off its 11 mn ton stockpile of cotton fibre. The stockpile equates to about 46% of the cotton fibre expected to be consumed globally in the 2015/16 season and about 151% of the amount expected to be consumed in China alone. Despite the magnitude of the stockpile, its presence has not yet had a dramatic effect on global prices as it has not been available to the world market. But this could change once the Chinese authorities start to sell it off. The impact on global prices will depend on the speed with which it is auctioned off and the prices obtained. Much of the fibre is of low quality and will therefore be hard to sell at market prices. Moreover, the quality of the stockpile is deteriorating over time. The stockpile has built up because of the Chinese government's former policy of buying cotton fibre to keep the price high and encourage farmers to plant the crop. The government had hoped to profit from buying cotton at low prices when the market was weak and selling it at higher prices when it was stronger. But when it auctioned cotton during July-August 2015 it lost an estimated 26% on its original investment. Furthermore, it wanted to sell 1 mn tons of cotton but sold only 63,413 tons because the asking price was too high. Since then global prices have dropped. In the forthcoming auctions, the government plans to sell at least 2 mn tons. One factor on its side is that the cotton crop is likely to fall short of demand in the 2015/16 season, and it may attempt to sell more than 2 mn tons if there is a shortfall. In this report, Robin Anson discusses the possible effects of the auctions on the global cotton market and draws comparisons between the current situation in the cotton market with the Australian wool crisis of the 1970s-1990s.
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