By Andrew Woods | Source: ICAC, ABARES, CRB, Cotlook, PCI Fibres
It is a year since Mecardo had a look at the cotton supply and demand situation. At the time the stocks to use ratio was at record levels and prices were forecasts to remain at fairly low levels. Cotton is a major apparel fibre, with a production level around ten times the size of the world wool industry, and which accounts for about 30% of total fibre production. This article updates the stocks and price situation for the cotton.
A year ago the stocks to use ratio was 87%, well above the normal level of 40-50%. The expectation from the International Cotton Advisory Council (ICAC) was that stocks would decrease by 5% in 2015-16, although ICAC did make the forecasts conditional about what happened in China. Figure 1 shows annual stocks to use ratio from 1980-81 (split into Chinese and non-Chinese components) overlaid with a cotton price series (Cotlook A Index). It shows the current estimated stocks to use ratio to be at 90%, a rise of 3% for the season. Clearly the adjustment of stock levels is taking longer than anticipated.
In Figure 1 the non-Chinese stocks to use ratio has generally ranged around between 30% and 40%, although it is currently at a high 44%, During the past 20 years Chinese cotton stocks as percentage of world consumption have ranged between 7% and 49%. During the past 20 years Chinese cotton stocks have been the big swing factor in cotton stocks and therefore in cotton prices. To give a feel for the size of the current level of cotton stocks sitting in warehouses and under tarps in China, in wool production terms the Chinese stockpile amounts to around 30 Australian wool clips.
Figure 2 compares the change in stock levels with the change in price. Changes in cotton stocks are a major factor in determining cotton prices. The official ICAC forecasts for the Cotlook A index is centred around 71 US cents per pound. In the early 2000’s when cotton was also struggling under excess stock levels in China, the Cotlook A Index fell around 42 US cents per pound.
Price is a real issue for the cotton industry. Figure 3 shows a price ratio for cotton to a polyester staple price series from the late 1980s onwards. It shows the cotton price spending quite a lot of time at or around parity with polyester staple prices. In the 2011 cotton boom the price ratio reached 2.4 before quickly subsiding, and falling to around 1.3 in late 2012. Since mid-2014 the cotton to polyester staple ratio has been rising and is currently a strong 1.7 which presents a real problem to cotton. Chinese cotton stocks need to fall, but while cotton is expensive in relation to polyester staple the manmade fibre is being preferred in China. This means that the required reduction in stocks is being delayed (or in the case of 2015-16 reversed) thereby extending the period of lower prices for cotton. To get the cotton to polyester prices down to around a ratio of 1.0 would require the Cotlook A Index to fall down to around US 40 cents per pound again.
Cotton stocks to use will finish 2015/16 slightly higher than expected. The Cotlook A Index is currently trading around 1.6 the price for polyester staple, which means the Chinese apparel industry is favouring the manmade fibre. This will extend the period of time for cotton stocks to fall normalise at lower levels, in doing so helping maintain a “dampening” backdrop to other apparel fibre markets such as the wool market.