By John Richardson
POLYESTER producers, and their raw-material suppliers, enjoyed a huge boost to their profitability between October 2008 and March 2011 when cotton prices increased by 468 percent from 40 cents/lb to $2.27/lb.
This led to polyester being substituted for cotton, and helped inspire a big capacity build in purified terepthalic acid (PTA) and polyester.
But since March of last year, cotton prices have been declining - and have fallen by 18 percent so far in 2012.
Of course, as with all commodities, market players are always trying to anticipate the point at which prices might bottom out. Thus, the I.C.E. Futures US contract for July delivery jumped by 3 percent earlier this week to 75.09 cents/lb on the theory that weak returns for farmers would result in less planting during H2.
And, interestingly, just as rising labour costs have eaten into the profitability of China's chemicals and polymers buyers, so too is the case with its farmers. Cotton planting in China's major growing regions has fallen by 10 percent this year on the higher cost of labour, according to the China Cotton Association.
But exceptional demand weakness could be the real issue for cotton prices in H2.
The historic surge in cotton prices in 2008-2011 was the result not just of supply constraints caused by flooding, and farmers switching to other more lucrative crops, but was also "a barometer of advanced economies' consumer sentiment and appetite," according to this article from Worldcrops.com.
"Even though countries like China and India are top producers and importers, their populations aren't the end consumers," continues the same article.
"In fact, domestic consumers in emerging markets generally appear quite prepared to switch to cheaper substitute textiles.
"International cotton prices don't reflect emerging market demand for cotton, but rather advanced economy macroeconomic sentiment."
Worldcrops.com believes that prices might have found a floor, well above their 40 cents/lb low of October 2008.
But how weak might Western demand for textiles become if the Eurozone crisis isn't resolved?
The problem is that with cotton, and with every other commodity, we are in uncharted territory.
And what applies to cotton also applies, to a large extent, to polyester - its substitute.
China is due to shutter 2.5m tone/year of polyester capacity between now and July, according to our ICIS colleague, Becky Zhang.
Polyester yarn and fibre makers in China have further reduced operating rates at plants to 68-73% this week, from 70-75% seen a week ago.
Overall inventories of Chinese polyester yarn plants swelled to 15-32 days' worth this week, compared with 11-26 days a month ago.
Purified terephthalic acid (PTA) plants are also being shuttered as PTA producers seek to reduce their off-take of paraxytene (PX) feedstock, according to Bohan Loh, also of ICIS.