(Bloomberg) –
China has purchased more than $ 1 billion in US cotton in the past three months. And you don’t even need it.
The purchases, made as part of the phase one trade agreement between Washington and Beijing, are hitting just as the pandemic closes clothing stores, decimating demand. That means China’s state-owned companies are hiding the cotton they bought, dampening the outlook for new imports.
The trade deal requires China to buy $ 36.5 billion in US agricultural products this year. That created a disconnect between real demand and purchases, which have been running at the fastest pace since 2013. More than 50% of defaults reported to the World Association of Cotton Exporters and the American Association of Cotton Exporters in the last year they engaged their Chinese counterparts.
“Recent purchases from China have not been correlated with downstream demand,” said Jon Devine, chief economist at Cary, North Carolina-based researcher Cotton Inc. “Much of that cotton is believed to be destined for the Chinese reserve system. If it is moved into storage, it can be used against future demand and offset future purchases.”
The spread of Covid-19 has wreaked havoc on the global cotton industry, with closings and bankruptcies of retailers, including JC Penney Co. and Neiman Marcus Group Inc., hurting demand. World consumption is forecast to drop by 23 million bales, the highest on record, estimates the United States Department of Agriculture.
China Mills
Chinese factories have seen no growth in orders since June, and 45% of surveyed facilities were losing money at the end of that month, 17 percentage points more than the previous year, according to the National Association of Cotton Textiles. The use of American factories also fell to a record low.
“While agriculture was deemed critical and essential and supply chains remained open, retail clothing sales suffered greatly due to the closings,” said Buddy Allen, president of the American Association of Cotton Exporters. That caused a “wave of disruption in the global cotton supply chain that created incredible costs, losses and risks for participants.”
With Chinese factories struggling, the performance of purchases made before the trade war and the coronavirus remains “weak,” Allen said. Other countries, such as India, Pakistan and Bangladesh have also defaulted, he said.
The recent rise in US cotton prices is further affecting the outlook for Chinese imports. New York futures have recovered more than 25% from the 10-year low reached in April, in part due to concerns about drought in the United States and Australia. China’s state purchases have also added fuel to the recovery.
China has not issued additional import quotas for factories like in 2019 and, in any case, has canceled purchases from the US in the two weeks until July 16. The nation is also selling government reserves to textile factories at a cheaper price than imports. All of this could point to a possible slowdown in purchases.
Rival Brazil
Rival cotton exporter Brazil is also feeling the pressure. Chinese private buyers are not picking up supplies from the South American nation, even when prices are cheaper, said Marco Antonio Aluisio, vice president of a group of exporters. He added that the trade agreement between the United States and China was bad news for Brazil.
China’s purchases of U.S. cotton could undoubtedly increase further as the government seeks to deliver on its phase one promises, said Wang Qianjin, head of the information department at the Shanghai International Cotton Exchange. China is still far from reaching the target.
“We are excited to see this increase in purchases, but we recognize the gap that still exists in commitments,” Allen said. “We hope to see the use of the plant increase in China and around the world very soon, otherwise we are only moving stocks from the United States to China’s balance sheet.”
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