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Cotton prices suffer worst crash in 55 years

Consumer demand
By Paul Hodges on 29-Jul-2014

Cotton Jul14aJust as forecast in March, world cotton prices have crashed.

Prices peaked at 97.35c/lb on 24 March, just 3 days after the post was published.  Since then, they have fallen by a third to 65c/lb.  They have now fallen for 11 straight weeks – the longest slump in 55 years, according to Bloomberg.

There is no need to repeat the rationale for this collapse, which was covered in detail in March and September.  The key was the stimulus policies which created stockpiles equal to 3 pairs of jeans for every person in the world.

Today’s crash is unlikely to reach bottom for some time.  Current US government forecasts suggest warehouse stocks will reach an all-time record high of 105.6 million bales next year, versus 94m in 2013:

  • US production is rising sharply, as the drought has ended in the cotton states of Texas and Louisiana
  • India is also now expected to have a good crop
  • China’s imports are forecast to fall from 20m bales to 13.5m this year

Cotton, of course, competes primarily with polyester in the fibre market.  And China’s polyester capacity has also increased dramatically under the stimulus economy of its former leadership:

  • It is expected to rise by 75% between 2010 – 2015, from 27.5MT to 48.3MT, according to ICIS data
  • Over the same period, its PTA capacity will almost treble from 17MT to 50MT
  • 14MT of PTA is scheduled to come onstream this year alone

Thus we have vast over-supply in cotton matched by vast over-supply in the polyester chain.

Trade data from Global Trade Information Services highlight the dramatic change now underway:

  • China has been the world’s largest importer of PTA, buying 3.1MT in H1 2012
  • Last year, these volumes halved to just 1.6MT in H1 as the new capacity began to come online
  • This year, volumes have halved again, to only 750KT

And the data also shows that China has begun to export major volumes of PTA for the first time in history, selling 230KT to India and the Middle East.

This parallels developments in other key markets, where China is also now becoming a significant exporter.  As GTIS data shows, it became a net exporter of PVC in H1, with exports reaching 550KT versus 415KT of imports.

The reason is that China needs to move up the value chain.  It has to replace textile factory jobs lost by its need to boost wages to increase domestic consumption.  And it is being successful, as new estimates for export growth show.

Back in February, when launching its major Research Note on the 7 global impacts of China’s new policies, the blog posed a key question:

“Why did nobody notice that China was the ‘elephant in the room’, in terms of being the main cause of today’s downturn in global demand and financial markets?”   Answer: “Because we were all wearing rose-tinted glasses”.

Current developments in cotton and polyester highlight how we are all still wearing the same glasses.

Cotton, polyester – and the fibre market they supply – are all major world markets.  Financial players should therefore be panicking about what this downturn means for other parts of the global economy.  But instead they remain convinced that “central banks now rule”:

  • They are therefore cheering China’s latest export data
  • They fail to understand this is not due to the sudden return of robust growth in the West
  • Instead it is driven by China’s need to support its own employment

This delusion may not continue much longer.  But in the meantime, the blog fears that cotton’s price collapse is opening another fault-line in the debt-fuelled ‘ring of fire’.

Will textile mills honour the contracts they signed at higher prices?  If they don’t, what will happen to all the traders who sold them this cotton?  And what will happen to all those who funded the speculative bubble that has kept prices at unrealistic levels for so long?

And, perhaps more importantly, will players now start to worry that other markets, like oil, might start to be ruled again by the laws of supply and demand, and not by central banks?