China's cotton prices soar devastatingly high

Domestic cotton may actually more damaging to the Chinese cotton industry at this point than imports

While China's cotton prices have hit a 150-year high, international cotton prices dropped sharply this year due to oversupply and declining consumption amidst an economic recession. In the face of competition from cheap cotton around the world, it will be a challenge for China to protect its local industry.

"Textile factories have reduced their production to a relatively low level. The utilization rate of large factories is 30-50%, while some small factories have suspended operations. Insufficient orders and a weak market have led to the inadequate production of textiles," an industry expert told Time Weekly.

China is a major textile manufacturer. The number of employees in its textile and apparel industry has surpassed 40 million. Data shows that as of 2011, the country's spun yarn production capacity accounted for 50% of the total world capacity.

A recent survey showed that between January and May of 2012, China's spun yarn production had dropped 1% from the same period last year.

The textile industry began declining last year. Due to weak demand from the international market and the high production costs of the local textile industry, some international orders were shifted to Southeast Asian countries, where production costs are lower.

In addition, the cost of cotton accounts for 70% of the textile industry's total cost. To a certain extent, cotton prices determine the survival or death of textile enterprises.

Domestic cotton prices have been growing since 2009. Between October 2010 and February 2011, cotton prices touched an extraordinary high of 32,000 yuan (US$5,020) per ton.

Ma Junkai, secretary general of the Dezhou City Cotton Industry Association in Shandong, attributed the surge in cotton prices to strong demand from the downstream textile industry, low domestic production volume and market speculation.

Between September 2011 and March 2012, the government collected and stored cotton as prices dwindled, a move that helped cotton prices stay between 19,300-19,600 yuan (US$3,027.55-US$3,074.61) per ton between the end of 2011 and March 2012, before dropping to 18,000 yuan (US$2,823.65) per ton recently.

Currently, if textile enterprises used domestically produced cotton, they would definitely suffer losses. If they used imported cotton, on the other hand, they could keep themselves afloat, said Zhang Wenjin, an industry expert.

Textile enterprises have to import cotton according to their allotted quota. According to a World Trade Organization agreement, China's cotton import quota was 894,000 tons, with a 1% preferential customs duty levied on imports covered by the quota, while 5-40% sliding duty is levied on imports beyond the quota.

Ma told the weekly that China consumes 10 million tons of cotton a year, while producing 7000,000 tons. This means its average import volume is 3 million tons a year.

The country usually increases its imports to meet cotton shortages.

Under such circumstances, preferential customs duties become beneficial, causing many cotton enterprises and dealers to scramble for the quota.