Export prices steady despite rising cotton costs

	NYBOT contract prices for October 2010 and December 2010 have increased 40 and 37 percent, respectively, over the past year.

Spot and futures quotes for cotton have been increasing in recent weeks. But keen competition and a weak EU market are keeping price increases of finished goods at bay.

Cotton prices have been rising over the past few weeks. While China suppliers of fabrics and yarns are quick to adjust quotes, manufacturers of downstream products such as garments, bags and home textiles are hard-pressed to keep prices steady.

Compared with three months ago, cotton costs, particularly for fabrics, rose between 3 and 5 percent in August. Yarn spinner Nanjing Jiefeng Textile Co. Ltd has already adjusted quotes according to spot and futures prices in the domestic market. Fabric mills have done the same. It usually takes three to four months for such cost increases to reflect in the prices of finished goods. This year, however, stiff competition and heightened price sensitivity among overseas buyers will make it difficult for exporters to pass on the additional expense to their customers.

Further, demand has been decreasing and suppliers do not want to exacerbate the situation by raising prices. Due to the debt crisis, EU buyers have been placing smaller orders or even canceling them entirely. Apparel maker Shenzhen Danyal Clothes Co. Ltd said exports to Germany and Italy have fallen roughly 20 percent over the past six months.

Ningbo Veken Elite Group Co. Ltd believes its shipments of garments and home textiles to the EU will drop 50 percent in the next half-year. The company is now banking on domestic sales to help bolster its earnings for the year.

Consequently, companies are implementing various measures to manage costs better. These include strategic positioning of patterns and cutting the pieces carefully to maximize a bolt of fabric. Guangzhou Textiles Holdings Ltd has stopped using expensive fabrics in apparel designs.

China's high demand for the fiber and government intervention are keeping local cotton prices on the upswing. With the harvest season slated to start in late September, Beijing is likely to implement measures to keep quotes high so farmers can sell their cotton at good rates.

As of Aug. 10, domestic 328 grade cotton spot prices were at 18,142 yuan ($2,660) per ton, up 11 percent from April 23 quotes.

But the central government is also taking steps to reduce the disparity between demand and output, and keep prices from increasing too fast. One of these is to approve additional import quotas for this year. Apart from the 1.89 million tons granted previously, the National Development and Reform Committee allowed an extra 800,000 tons to be purchased in May and 910,000 tons in June. Apart from this, Beijing released 600,000 tons from the cotton reserve in June. Yarn makers started bidding for the stockpiled fiber on Aug. 10.

The China Cotton Association is hoping these measures would be enough to meet demand from textile manufacturers and stabilize quotes.

Cotton costs in the international arena cooled down in August as a result of several events.

In July, the India government lifted its ban on cotton exports, which was in place since April. In the same month, Pakistan removed its 15 percent export tariff on cotton yarn. Additionally, a report released June 30 by the United States Department of Agriculture showed the 2010/2011 planted area for cotton is now expected to reach 10.9 million acres, up 3.9 percent from March estimates.

Concerns that the EU will slip into a double-dip recession have dampened demand as well, leading to lower prices in futures markets.

NYBOT prices for October and December cotton contracts were 84.38 and 81.13 cents per pound, respectively, on Aug. 10. In contrast, May and July futures reported on April 20 were at 82.85 and 84.60 cents per pound. China's strong manufacturing growth in August and a depreciating dollar, however, pulled up quotes. As of Sept. 2, October and December contracts settled at 90.87 and 89.49 cents per pound.