Continuing erratic behavior of cotton costs has made it difficult for China suppliers of finished goods to be optimistic for 2011 exports, despite rising orders.
Although China's cotton supply has stabilized of late, spot and futures prices in both domestic and international markets continue to shoot up.
In the past, cotton costs have tended to slide once output starts meeting demand. With China releasing more cotton to the market, bringing the total stockpile in the country to 981,901 tons, industry players from yarn spinners and fabric mills to finished goods makers and analysts expected prices to decline. But this recent phenomenon-where costs continue to climb despite increased supply-is making it difficult for suppliers to gain a better sense of market conditions for the months ahead.
China makers of cotton-based products are generally not optimistic about 2011 exports. Most believe overseas sales growth will depend mainly on changes in raw material costs and the yuan's value against the dollar.
Dong Shuzhi, general manager assistant and director of the Research Institute of Jinshi Futures Co. Ltd, said most textile companies can no longer afford the high cost of cotton, which nearly reached 31,000 yuan per ton in mid-November. It has since dropped to almost 27,000 yuan per ton.
Guotai Junan Securities analyst Zhang Wei said the high cost of cotton has already trickled downstream, and is likely to bring up export prices of finished goods in H1 2011. This could result in lower profit margins for most small and midsize businesses, many of which may be forced to close down.
There are several reasons behind the unusual cotton cost hikes, with 2009/2010 demand outstripping supply one of the primary ones. Consumption fell drastically in 2008/2009 because of the financial crisis, leading many cotton producers to reduce planted areas for the following season. During the period, statistics showed China's planted cotton acreage dropped 14 percent year on year to roughly 5 million hectares, with output falling almost 15 percent to 6.4 million tons. With sales of textiles and related finished goods now recovering steadily, producers are unable to meet demand in a timely manner.
Poor weather conditions contributed to low output as well. China's major cotton planting areas, including Xinjiang, and the provinces of Gansu, Shandong, Hebei and Henan were all hit by heavy snow and frost, factors that reduce yields. Flooding in Pakistan, a major cotton-producing country, has affected global output as well.
Market speculation is another reason. The practice gained pace when cotton hit 18,000 yuan per ton. In just two months, domestic cotton prices increased 56 percent to 28,000 yuan per ton.
Higher export prices
Cotton prices have been increasing steadily for nearly a year now, consequently pulling up the cost of related raw materials such as yarn and fabrics. So while makers of apparel and textile-based products are relieved that export orders are improving, escalating material expenses have made them cautious about finalizing transactions. Many do not want to accept long-term contracts that will bind them to a price point. This comes especially since it is difficult to estimate how much material costs will change in the months to come.
Some suppliers have chosen to raise export quotes instead, albeit minimally. To compete with other companies and retain existing clients, they cannot transfer all additional expenses to buyers and have to absorb part of the extra costs.
Shanghai New Leads Import & Export Co. Ltd has seen the cost of cotton yarn and white steam filature increase more than 100 percent year on year in October. Since the beginning of the year, raw material outlay went up at least 10 percent, labor expenses grew 5 percent and the yuan has appreciated by roughly 3 percent. Even so, the company has only been able to impose a 5 percent markup on export prices.
Although a few businesses, including Shanghai New Leads, could continue with this practice for a considerable length of time, other makers do not have sufficient capital to bear the losses. Such suppliers would sometimes turn down an export order if they cannot negotiate acceptable export prices with buyers.
This is the case with Zhejiang Jinsuo Textile Co. Ltd. About three or four transactions have been canceled because the potential clients were not willing to accept the price increase.
While very few manufacturers of finished products have problems with cotton supply, China Cotton Association information department director Ma Aifang said some yarn spinners are frustrated with their fiber contracts. Such makers indicated their overseas cotton suppliers did not want to honor previously signed agreements about volume and pricing.
When those contracts were finalized, the cost of imported cotton ranged between 80 and 90 cents per pound. Now, those cotton suppliers are allegedly charging them for current spot prices, which are from 150 to 160 cents per pound. This practice is being done not only by overseas cotton suppliers, but by local providers as well.
This article was written by managing editor Aimee Ocampo originally for Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.
Article Source: http://EzineArticles.com/?expert=Aimee_Ocampo
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