China Cotton Situation Report (June 2007)

The domestic cotton supply plus import quota releasedin due time can meet with spinners need in this season ascan be assured by the fact that the spring sowing of cottonis finished in May, and summer sowing progresses well onits move. Despite bad climate in some regions, the cottongrows in a normal fit in most districts. The source from ChinaCotton Association (CCA) gives an optimistic note, the cottonacreage this year will be 81.64 million mu, equal to last year.Source from China National Textile and Apparel Councilshows a steady export growth in cotton-textiles and apparelsto trigger cotton demand.

Cotton Planting and Growing

In spite of drought in the south and watrlogging in thenorth of Xinjiang, 20.07 million mu is already finished withsowing, taking up a quarter of China's total sown area of 81.64million mu this year, a 5.5% increase to compare with 2006.

In May, the national climate is regarded as good for cottonas sunshine and hot weather in most periods sustain in thenorth, but the early Spring met with a lot of rains and sunshinereturned after Mid-Spring. The Spring sowing is over andSummer sowing got a start. In general, the cotton growing isnormal.

Cotton Supply

Price in a Stable Step-up

The monthly statistics release that over 80% of domesticcotton have been sold, while Xinjiang sold 90% of its harvest.The cotton price turned from a downtrend to be stable in Mid-May, which strengthens confidence both from buyers andsellers. Electronic Market and Zhengzhou Futures Exchangepresented a slightly progressive pick-up in price.

The price assumes a dramatic change as it went throughthe early-stage down-run, mid-stage stability to the final chalkup only in one month of May. It is dramatic but not drastic, forthe price is seen as staple on the whole. China Cotton Index(CCIndex) of Type 328 grades shows ~12,948 per ton at thelowest, ￥13,026 per ton at the peak, resulting in an averagedprice ￥12,971 per ton that goes down ￥48 per ton or 0.37%from March, down by ￥1,097 or 7.8% compared with thesame period of last year.

Cotton Import Slides Down, the Price Slightly up

The import keeps decreasing in May (201,000 tonsimported in this month), 14,000 tons less or 6.5% downcompared with April. If we compare with the same period oflast year, we can see a reduction of 263,000 tons or 56.7%less. The first five months this year witnesses a cumulativeimport figure for 924,000 tons, a drop by 55% against lastyear. In 2006 cotton season (September of 2006 - April of2007), China imported 1.539 million tons of cotton. As thedomestic supply is on the wane, more import is projected inthe coming months.

On May 31st, China Imports Cotton Price Index (FCIndex M) shows 59.59 cents per pound, higher by 0.48 centsfrom April 30. The averaged 59 cents per pound in May issomewhat equivalent to 11,667 Yuan/ton (1% tariff), 1,304

Yuan lower than Grade 328 of domestic cotton.

If the cotton is imported at the sliding duty tariff (Chinesesystem for the off-quota imports), the import price is 13,026Yuan/ton, 55 Yuan higher than the domestic cotton Type 328.If Chinese Yuan continues to rise in value, the price advantagein import will be more obvious.

Cotton Demand

Cotton Yarn Production Grows Fast

State Statistics Bureau releases yam production achievedin May to see a 19.7% year-on-year increase to 1.64 milliontons. The cumulative output for the past five months increasedby 20.6% to arrive at 7.41 million tons.Textiles and Apparel Exports Going up,Cotton Products Take Major Share

According to the General Administration of Customs, totalexport of textile and clothing from Jan. to May comes up to$57.373 billion while the export of cotton-textile and apparelamounts to $25.12 billion, 25.35% up as opposed to the sametime last year. Of the totality, the cotton-textiles export is$6.95 billion, 9.36% higher, and cotton-apparel export is$18.16 billion, 32% higher than its corresponding months lastyear. It is important to note that the cotton-textiles and apparelaccount for 43.78% of the total export by far, and the cottontextiles take up 33.65% of the total textile export whereasthe cotton apparel represents nearly 50% of the total apparelexport for the last five months.

Policy Impacts

China started to use financial tools to dampen the heat ofthe fast-growing investment in some of its already excessiveproduction, textile is one of the industrial sectors in question.In May, the Central Bank raised its yearly RMB depositinterest rate by 0.27% while the one-year loan interest by0.18% to increase this benchmark for borrowing and lending.Undoubtedly, these adjustments drive up operating costs forcompanies who are in need of money to handle cotton business.

To fuel that anxiety, China has adopted a more flexibleband of its currency exchange rate, resulting in its RMBappreciation to arrive at 7.65 ( $1 : ￥7.65). That will impact itscotton import and textile export, price-wise.