China’s plan to sell raw cotton cheap in the domestic market to cut down its inventories may hit exports from the country.
With massive reserves to offload, allocation of import quota by the country has become uncertain.
China could cut the base selling price of 18,000 yuan/tonne ( Rs. 1.84 lakh) of cotton by about five per cent to spur purchases, according to trade sources.
This may diminish the arbitrage advantage offered by Indian imports. Now, Indian raw cotton is available for Chinese mills are at around 12,301 yuan.
Chirag M Pan, Chief Executive Officer of Rajkot, Gujarat-based Jaydeep Cotton Fibres, which shipped 40,000 tonnes of raw cotton, about 65 per cent of its exports, to China during 2012-13, says exports will come down significantly this year. “Since the Chinese markets are closed for New Year, we are not able to get the indicators on whether more import quotas will be issued. We have been receiving reports about a price cut, but nobody can predict Chinese policy.”
According to the Chinese Government’s cotton news website cncotton.com, as on January 22, about 4.01 lakh tonnes of cotton found their way into the textile mills and garment factories jeopardising Indian exports.
Why China is doing this is not far to seek: A 2011 procurement programme to allay fears of cotton growers and encourage planting boomeranged.
It had set a high floor price of 19,800 yuan a tonne ( Rs. 2.03 lakh), at least 4,000 yuan higher than the prevailing global average, jacking up prices of domestic cotton yarn and making Indian imports attractive.
Last month China said it is unwinding the inventory it built over the last three years, and support growers through a subsidy programme.
The US Department of Agriculture estimates say by March 2014 China will be stuck with more than 58 million tonnes or 60 per cent of the global cotton inventory.
DL Sharma, Managing Director, Vardhman Yarns and Textiles Ltd, said, “With such high reserves, I wonder if China will issue more import quotas.” It could cut back on duty-free import quota. The country has a complex “sliding tax” system, where imports above the quota attract duties in the range of 4-40 per cent.
(This article was published in the Business Line print edition dated February 13, 2014)