Soft Cotton Prices Only Temporary

China cotton prices have been falling of late, but analysts are expecting supply-demand factors will drive quotes upward by 2H11. The earthquake that struck Japan may have cooled cotton spot and future prices in international and China markets, but quotes are not likely to soften through the rest of the year.

After peaking at 31,098 yuan ($4,745) per ton on March 14, domestic spot prices for 328-grade cotton fell nearly 2 percent the following week. Quotes have been sliding since. Compared with March 14 rates, April 2 spot prices are down 4 percent to 29,852 yuan ($4,555) per ton. But short cotton supply is expected to pull prices back up again by the second half. Zhang Wei, analyst at Guotai Junan Securities, said demand continues to outpace supply, even after new cotton was released in September 2010. Zhang said, however, that the immediate price drop shows cotton quotes were just artificially high. Even so, while prices are likely to continue falling to mid-2011, they are not expected to fall back to year-ago levels. As a result, suppliers of cotton-based export products in China are continuing to look for ways to cope with the cost pressure. Mixing less expensive fibers such as polyester into a cotton blend is one of the most common measures taken by apparel makers. At 14,800 to 15,300 yuan ($2,252 to $2,328) per ton in the domestic market, polyester costs nearly 50 percent less than cotton.

Huang Sijing, administration manager at Jiaxing Mengdi Import & Export Co. Ltd, said semi-worsted cotton yarn is adopted for some of its sweaters instead of worsted versions to bring down costs. Huang said the resulting garment has a hand feel similar to worsted fabrics at a cost closer to woolen cotton. Such models are likely to account for a greater share of exports if cotton prices stay at a high level for an extended period of time. Some companies such as Hangzhou Wantong Trading Co. Ltd are developing branded lines for the domestic market. The apparel maker participated in local trade shows in March 2011 to promote its brand. Larger enterprises move some production processes to inland provinces. Last year, home textiles manufacturer Ningbo Veken Elite Group Co. Ltd bought two dyeing plants in Jiangxi province. This has enabled the company to offset higher cotton costs with savings in processing expenses.

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