21st Century Business Herald reports something relatively new: cotton inventory on the rise. But for a rather unusual reason. Not only is the demand for cotton slowdown because of poor external demand, but because of traders apparently speculating.
Since the external demand has already fallen off the cliff while some companies are rather cash strapped, the textile industry in China is under tremendous pressure. And that is not particularly surprising, as the global financial crisis is already hurting economic growth everywhere.
What’s interesting is that the international prices for cotton is apparently lower than domestic prices for cotton. In fact, much lower. The spread between international and domestic price have risen to RMB4,500 per tonne. Because of this, quite a number of traders of cotton are importing large amount of cotton, paying 20% of down payment and small amount of fee for warehouses in ports, while waiting to sell the inventory to the domestic market at better prices.
As inventory of cotton built up, warehouses in a port in Qingdao are now fully utilised, while they were usually only 70% full in the past. On the other hand, textile companies, especially the small and medium sized companies, are cutting down production or closing down due to poor demand while domestic prices held up.