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Chinese cotton auctions fail to clear stocks

For nearly two months China has been having daily auctions of its huge cotton reserves. But only a fraction of the stocks have been sold. The reason: high pricing and a slowing of economy. With sufficient inventory still available in the market and state auction prices relatively high, mills largely stayed away. Discounts would have risked pushing down market prices and led to increased costs for the government under a new subsidy scheme that has replaced stockpiling.

The poor auction results raise questions about how the government will get rid of the rest of its stock. Both yields and quality of China’s new crop, expected to start harvesting soon, are better than last year and prices are likely to be lower than the sales price set in the latest auctions. If prices remain relatively low, reserves would be under pressure to reduce their selling price in any future sales, increasing already substantial losses on the fiber that was bought at prices well above the market.

Beijing had been under pressure to release stocks to recover part of the cost accrued while building a stockpile of around 11 million tons of cotton under a now-abandoned state buying scheme to support farmers.

 
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