Cotton inventories set to fall for first time in six years

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Global inventories for cotton are forecast to fall for the first time in six years as China tries to reduce its state holdings and dry weather hits key producers.

World stocks, which are currently at record levels, are expected to fall 8 per cent to 20.4m tonnes in the 2015-16 crop year, with production declining 15 per cent to 22.2m tonnes, according to the International Cotton Advisory Committee (ICAC).

Inventories in China, whose stocks account for more than half of the world’s total, are forecast to fall 7 per cent to 12m tonnes, while stocks for the rest of the world are predicted to fall 9 per cent.

Cotton was one of the few commodities to gain ground in 2015, rising 5 per cent to close the year 63.28 cents a pound. However, speculative selling has depressed the commodity, and it is currently trading at 58.25 cents.

For the 2016-17 crop year, the ICAC expects cotton inventories to fall further to 19.5m tonnes due to a supply shortfall of about 1m tonnes with production at 23m tonnes against 24m tonnes of consumption.

Despite the production and consumption imbalance, some analysts are still bearish over the price outlook due to the continued high inventory levels.

BMI Research said it had revised the 2016 average price forecast from 68.5 cents a pound to 63 cents. Its analysts said: “We expect China to draw down its ample stocks to fill the gap rather than turn to imports, thereby providing only limited bullish pressure on the global market.”

Cotton consumption in 2015-16 is projected to fall 2 per cent to 23.9m tonnes from the year before, as low prices for polyester, the main competing fibre, has hurt cotton demand.

Cotton consumption in China, the world’s largest consumer, has declined continuously since 2009-10 when it reached just over 10m tonnes, according to ICAC. In 2015-16, cotton consumption in China is forecast at 7.1m tonnes, down 5 per cent, while India’s cotton consumption is expected to decline 2 per cent to 5.3m tonnes.

Cotton consumption in Pakistan is projected to decrease 12 per cent to 2.2m tonnes due to the weakened demand from China. In contrast, consumption in Vietnam is forecast to increase 22 per cent to 1.1m tonnes in 2015-16 as China continues to invest in spinning mills in the country.

Analysts expect a slow uptrend in cotton prices as the level of stocks gradually weakens. With China continuing to deplete its inventories, “our long-term bullish view is based on an eventual return of China to the import market”.

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