China rumours send cotton market lower

Reports about the risk of credit card default in China spark panic in the domestic cotton market.

KARACHI: Reports about the risk of credit card default in China sparked panic in the domestic cotton market on Saturday, pushing prices to Rs8,000 per maund (37.324 kg). The official spot rate stood at Rs8,500.

According to the Wall Street Journal, China’s central bank, in its third quarter report released a couple of days back, noted a rapid increase in credit card lending and warned about risks of default, as regulators seek to manage ample liquidity in the banking sector. China, a major importer of Pakistani cotton, is one of the main drivers of the domestic market, but warning of the risk of default forced ginners to sell cotton at whatever prices offered by the mills, cotton analyst Shakil Ahmed said. Earlier in the day, the market was doing well and prices had increased to Rs9,000 per maund.

The New York cotton market, which has dropped sharply from its highs of $1.57 per pound earlier this month, also had an impact on Pakistan’s market. On Friday, benchmark March contract on the New York market fell 4.83 cents to 111.73 cents as the US started supplying new crop, while crops of Brazil and Argentina are due in coming days.

This season, Pakistan’s cotton crop is expected to face a shortfall of 1.5 to 2 million bales because of damage to the fields caused by the floods. The country is expected to produce 12.5 million bales compared with annual consumption of 16 million bales.

Ahmed said the deficit will be bridged through import from Brazil, Argentina and central Asian states. India is also a potential and preferred supplier and its traders are offering cotton at 124 to 125 cents per pound to Pakistani importers.

However, Ahmed said, traders have expressed fear that Indian exporters may back down from their offers if prices again climbed in the international market.

Earlier in the season, importers had contracted to buy 550,000 bales from India at 70 to 90 cents but the Indians later refused to supply at these prices when the world market shot up to around 120 cents per pound.

Ahmed predicted that cotton prices in the domestic market will reach around Rs10,000 in February next year as supplies will dry up by then and the new crop will not come before July.

Published in The Express Tribune, November 28^th, 2010.