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Cotton prices slip as India reverses export ban

Oil markets
By Paul Hodges on 14-Mar-2012

Cotton Mar12.pngCotton prices are falling again, since Monday’s reversal by the Indian government of its proposed ban on cotton exports. India is the world’s 2nd largest cotton exporter, after the USA, with 20% of the market:

• On 5 March, its Textiles Ministry banned all exports
• Domestic users had applied pressure to divert supplies to local markets
• Domestic prices immediately fell, whilst world prices jumped 5%
• Cotton farmers, and major importers such as China, then protested
• This week, the Agriculture Ministry announced the ban’s partial removal

The chart highlights the extreme volatility that has hit cotton markets since 2009. Demand suddenly jumped as China’s bank lending spree and stimulus programme took effect:

• Prices soared from 46c/lb in March 2009 to 227c/lb on 7 March 2011
• A drought in the USA also helped to reduce supplies
• But recently, prices and demand have weakened
• Last week’s 5% price rise on news of the export ban is already history

This is yet another clear indicator that China’s economy is cooling fast. In turn, this will reduce inflation, and help the government achieve its main policy objective of social stability.

The cotton price now seems headed back towards its traditional 50c-70c/lb range. This has important implications for petchem markets, and the C8 chain into PTA and PET.

Textile companies routinely change the blend mix between polyester and cotton, depending on the relative price between the two. So if oil prices stay high, C8 volumes and pricing will come under further pressure.