China to Restart Cotton Auctions, Threatening to Test Market’s Fiber

China hopes to sell off some of its 11 million metric-ton stockpile, the world’s largest

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A worker moves freshly harvested cotton at a plant in Aksu, in the Xinjiang Uigher Aotonomous Region, in 2015. China is sitting on the world’s largest stockpile of cotton.
A worker moves freshly harvested cotton at a plant in Aksu, in the Xinjiang Uigher Aotonomous Region, in 2015. China is sitting on the world’s largest stockpile of cotton. PHOTO: REUTERS

China plans to restart auctions to sell off some of its 11 million metric-ton stockpile—the world’s largest—in the second half of April, a move likely to keep cotton prices under pressure meanwhile.

China’s National Development and Reform Commission, an economic planning and development agency, will hold auctions from the middle or end of April to reduce its cotton stockpiles, Yin Jian, deputy director of the agency’s trade department, told The Wall Street Journal.

The amount and quality of cotton to be sold in the auctions hasn’t yet been announced.

Most of it will be sold to domestic buyers but it could impact global prices by reducing demand for foreign cotton from Chinese buyers. It is impossible to say how much impact the auction could have on global prices because it isn’t known how much will be sold and of what quality it will be.

This will be the second series of auctions held by agency in an attempt to reduce its stockpile. In July to August of last year, it tried to sell one million tons of cotton but fell far short, selling only 63,413 tons because buyers considered the asking price too high.

However, supply is likely to be tighter in the Chinese market this year because the government has tightened import quotas for cotton, leading to less global access to the China market and a 65% drop in imports in February from a year earlier.

China ended up with about 60% of the world’s cotton stockpiles after it introduced a program in March 2011 to improve the livelihoods of domestic cotton farmers by buying cotton at a set price above those set by the global market.

The Chinese government has begun to reform its agricultural sector and is trying to reduce the stockpiles and bring prices in line with global levels Furthermore the government can’t hold on to the cotton indefinitely because it deteriorates over time.

China’s cotton-industry website cncotton.org earlier reported that Mr. Yin had said the agency plans to sell more high-quality cotton and would prioritize the sale of imported cotton at the coming auctions.

Furthermore, the agency intends to buy some high-quality cotton following the auctions, the website’s report said.

The expectation of a new round of selling by China—the world’s third largest cotton consumer—has pushed down prices on the benchmark ICE Futures U.S. exchange. Cotton has fallen about 5% since the beginning of the year. The May contract settled at 58.37 cents a pound on Tuesday in New York.

Cotton prices will likely trade at around current levels until there is further news around the auctions. The market is especially interested in the quality of cotton to be sold, said Tobin Gorey, agri-strategy director at Commonwealth Bank of Australia. If there are significant stocks of high-quality cotton on offer, that will replace the need for some of China’s imports.

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