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China’s strategic procurement of US cotton to balance import losses

"The market expects China to purchase foreign cotton. If procurement indeed takes place, prices of US cotton price will gradually rise. This will make it difficult for Vietnamese cotton yarn traders to reduce prices.  Vietnamese yarn mills are already running in losses, and exports to China have no price advantage."

Chinas strategic procurement of US cottonWithin the next two years, China will purchase agricultural goods worth $400-500 billion from the US. This has led to a wide speculation of whether China will now buy cotton from the US. If this happens, it will impact international cotton yarn trade by strengthening the price trend of international cotton and cotton yarn. Prices of domestic and foreign cotton will remain low which will make it difficult for the US to export cotton yarn to China. This will further pressurise Chinese traders by shrinking their trade. 

This loss will compel cotton yarn import traders to exert pressure on forward market, increasing the burden on yarn exporting countries of the world. At present, no other country, except China, can accommodate the surplus cotton yarn produced by countries like Vietnam, India, Pakistan, Uzbekistan, etc. As a result, these countries can only export cotton yarn to China. 

Rise in US cotton prices to impact Vietnam tradersChinas strategic procurement of US cotton to balance import losses

The market expects China to purchase foreign cotton. If procurement indeed takes place, prices of US cotton price will gradually rise. This will make it difficult for Vietnamese cotton yarn traders to reduce prices.  Vietnamese yarn mills are already running in losses, and exports to China have no price advantage. The spinners can only undersell stocks or sell at losses to Chinese traders when they cannot find substitute markets. If China purchases US cotton, its import of cotton yarn may shrink but the shrinkage will be not be large, mainly supported by various factors.

As no other market except China can accommodate the cotton surplus of countries like Vietnam, they are forced to sell at low prices. This increases their cycle of losses. For Vietnamese yarn, as prices of US cotton are more than that of Brazil and West African cotton, the amount of US cotton being purchased by Vietnam is likely to decrease. In addition, poor export of cotton yarn may accelerate the development of downstream textile market in Southeast Asia and increase local consumption of cotton yarn.

Chinese purchases of US Cotton to benefit global market

 If the Sino-US negotiations develop well, China will procure massive amounts of US cotton which will drive global cotton price. Chinese traders will also benefit from the time difference between Jan and Mar in international cotton trade. The advantages of processing costs will also benefit them and the country’s outward investment flow in cotton yarn will increase.

The purchase of US cotton by China will thus have a certain impact on imported yarn market. However, if this procurement is carried out methodically, imported yarn traders and foreign mills will be able to bear greater pressure. Though import of cotton yarn may shrink, losses would still be manageable.

 

 
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