By John Richardson
RISING cotton prices might well have been the single-biggest factor on the strength in the synthetic textiles chain for the last year.
Other major factors have obviously been the surge in crude and supply constraints in both paraxylene (PX) and purified terephthalic acid (PTA) - but certainly not in mono-ethylene glycol (MEG)!
China has also added a lot of new polyester capacity after several years of low investment.
But now support from cotton is eroding as a result of a very familiar problem: Affordability.
Textile mills that were scrambling for scarce bales earlier this year are now seeing yarn inventories building up, according to this article in the Financial Times.
"High prices are finally rationing demand," Terry Townsend, executive director of the International Cotton Advisory Committee in Washington, told the newspaper.
Sales from the US, the biggest exporter, were slowing last week.
China, the largest cotton importer, cancelled orders for more than 100,000 bales in April after heavy buying in March, according to the US Department of Agriculture.
Hong Kong-listed Weiqiao Textile, the world's largest yarn maker, has cut the price it will pay for domestic cotton four times by a total of Rmb2,000 ($307) per tonne this month, according to Ray Butler of Cotton Outlook, an industry publication.
High cotton prices may translate into more expensive clothing this year, feeding inflation concerns, the article added.
"We have sort of hit a brick wall where spinners have just not been willing to enter the market. That is presumably based on poor orders for their products and mounting inventories of yarn," Mr Butler said.
And yesterday, the International Cotton Advisory Committee warned of a significant slowdown in demand.
"Very high cotton prices, problems of credit access, and the fact that cotton yarn prices did not increase as fast as cotton prices and started yielding ground in mid-March 2011, are all affecting mill use," it said.
."Global cotton use is expected to reach 25.1 million tons in 2010/11, almost unchanged from 2009/10. A slowing of spinning operations and an increased switch to chemical fibres are curtailing demand for cotton and are reducing its share of world fibres.
"World cotton production is projected to exceed mill use in 2011/12, which would result in ending stocks recovering to 10.1 million tons. The world ending stocks-to-use ratio, forecast to reach an all-time low of 33% this season, could rebound to 39% in 2011/12. This would remain lower than the 10-year average of 49% prevailing before 2009/10."
Prices were down by 24% as of late last week from their March peak.
Opinion is divided over whether this a longer-term trend as a result of reports that China, despite the recent surge in pricing to record highs, is planting less cotton.
But to what extent have farmers in China, and elsewhere, been hoarding cotton - and therefore, to what degree might unwinding of these stocks unwind the current decline in pricing?
Evidence from pricing up and down the synthetic textiles chain suggests that the cotton factor, along with credit tightening in China and other measures being taken to fight inflation, are having an effect.
PX prices continued to decline last week, according to our colleagues at ICIS pricing. Traders were struggling to obtain outlets for second-half of May cargoes as FOB Korea prices slipped by $35/tonne to $1,565-1,575/tonne.
PTA was now down by $200/tonne from its March peak as result of it being assessed at $1,320-1,330/tonne CFR mainport China last Friday.
Interestingly, though, MEG has stayed a rally with pricing up by $25-30 tonne, according to the blog's colleague at ICIS pricing, Becky Zhang.
This was the result of stronger crude and more buying interest among traders.
But the market did not feel the increases, after several weeks of decline, were sustainable. Buyers said that they were unwilling to build inventory because of uncertainties over the impact of China's credit tightening.
As we said last week, cotton could recover if reports about China planting less are true and more bad weather occurs (floods in Pakistan were, for example, a big cause of the recent shortage).
Another concern, though, is whether cotton, like all other commodities including petrochemicals, has reached a peak on the affordability issue.
It looks like commodities might be supported for considerably longer by the Federal Reserve's indications that US interest rates will be kept at their historic lows for a good deal longer.
This is despite QE2 likely to be brought to an end this summer.
But harmful inflation is harmful inflation as everyone should remember from 2008.