25 August 2006
The growth in cotton trade, driven by China's booming import needs, will have significant implications for relationships within the trade arena, according to a report by Rabobank, the worlds leading agribusiness bank and second largest lender to rural Australia.
The report's author, Food and Agribusiness Research (FAR) team cotton analyst, Stephanie Lowe reports that the volume of cotton traded globally surged in 2005/06 spurred by China's increasing inability to meet its mill needs via domestic production.
China's import needs increased by 156% to 1.4 million tonnes in 2005/06, a trend the report predicts will continue in the medium term. Global exports increased to 9.4 million tones and are expected to increase slightly in 2006/07 to a record 9.45 million tonnes.
"The rise in exports in 2005/06 has led to a structural shift in the volume of exports as a percentage of total production. From 1996 through to 2004, exports averaged approximately 31% of total production. For 2005/06, exports were 37% of total production and are estimated by ICAC to remain between 35% and 37% of production over the next five years," Ms Lowe says.
Suppliers that benefited from the tripling of China's imports in 2005/06 were the U.S., Australia, Brazil, India and Uzbekistan. Ms Lowe says that these suppliers will remain the same in 2006/07, but India is likely to increase its market share, with its exports forecast to increase by 60% year-on-year in 2006/07.
Looking at future demand, China, India and Pakistan's mills are expected to account for 65% of demand in 2006/07, compared to 45% in 1995/96 and 38% in 1986/87.
"China has emerged at the core of the global cotton market and this will only be amplified over the coming years. China's consumption, which is 42% of global demand, is forecast to increase by 27% over the next ten years to 55 million bales," Ms Lowe says, going on to say that the gap between mill consumption and domestic production is expected to widen further.
Ms Lowe says that the removal of the last of the safeguards on textile and apparel imports in 2008 for the EU and the U.S., combined with the improved price competitiveness of man-made fibres, will most likely see demand for cotton from China expand further over the medium term.
"Consequently, so will imports of raw cotton, as China's ability to produce textiles using domestically produced cotton diminishes due to competition for land," Ms Lowe says, adding that the increasing concentration of the cotton business in China and the challenges of conducting business there are likely to impact on trade.
According to the report, China is dominating in both world consumption and the trade arena and Ms Lowe warns that dealing with such a dominant player presents potential challenges, especially given the lack of market information regarding supply and demand.
Ms Lowe says that the regions currently meeting China's supply demands, the U.S., Uzbekistan, West Africa, Australia and Brazil, will change over the short to medium term because of changes in supply and pricing competitiveness on the world market.
Ms Lowe says that there will be increased demand for lower priced cotton from Brazil, West Africa, CIS states and potentially India, with the differential in equivalent grade cotton made up by higher cost producers such as the U.S. and Australia.
"According to the Cotton Economics Research Institute, the most significant growth in exports from the five regions will come from Brazil, West Africa and Australia, who are expected to increase exports by 123%, 22% and 21% respectively. India is also likely to emerge as a significant exporter and will be one to watch," Ms Lowe says.
Ms Lowe concludes by saying that the expansion of the trading arena will present a more challenging environment for the Australian cotton industry, as it will place pressure on the industry to be more competitive in terms of cost and quality. The fact that it will need to expand its business within China, also presents challenges.
"The Australian industry needs to maintain an exposure to a number of import markets to ensure it is not overly exposed to the volatile nature of doing business in China," Ms Lowe says.
Rabobank Australia is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and, in recent years, has twice been awarded the title of the world's safest bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank Australia is one of Australia's leading rural lenders and a significant provider of business and corporate banking and financial services to the Australian food and agribusiness sector. The bank has 46 branches throughout Australia.
Contact
For further information please contact Denise Shaw, Public Relations Manager (Tel: +61 2 8233 8744) or email on sydney.mediarelations@rabobank.com.