Auctions shift only fraction of China's huge cotton stockpile

A nearly two-month series of daily auctions from China's huge cotton reserves has drawn to a close, selling only a fraction of fibre offered due to high pricing and a slowing economy.

Beijing had been under pressure to release stocks to recover part of the cost accrued building a stockpile of around 11 million tonnes of cotton under a now-abandoned state buying scheme to support farmers.

But big discounts would have risked pushing down market prices, and lead to increased costs for the government under a new subsidy scheme that has replaced stockpiling.

Data compiled by CottonChina.org, a trade website backed by reserves sales manager China National Cotton Exchange, said 63,412 tonnes of cotton was shifted by the time sales ended on Monday, or just 3.4 percent of the total offered.

That is way below what industry had expected, with some estimating ahead of the sales that Beijing could sell around 300,000 tonnes. Officials had said they wanted to offload as much as 1 million tonnes.

But with sufficient inventory still available in the market and state auction prices relatively high, mills largely stayed away. Benchmark prices in the auctions ranged from 13,200 yuan ($2,126) to 15,500 yuan per tonne, compared to prices for the most active contract on the Zhengzhou exchange now around 12,465 yuan.

"We're also experiencing a serious decline in consumption, whether because of switching to man-made fibres or a slowdown in consumption overall. This (summer) has been one of the slowest markets in many years," said a China-based trader, declining to be identified due to the sensitivity of the matter.

Mills are unwilling to carry any excess stock in the current climate and are only buying hand-to-mouth, said industry participants.

Those mills that bid for state fibre focussed on the cheapest crop, 2011 domestic cotton, buying 52,695 tonnes. None of the 2012 domestic cotton has been sold, and only 9,730 tonnes of imported fibre was bought, according to the data.

The poor auction results raise questions about how the government will get rid of the rest of its stock.

Both the yields and quality of China's new crop, expected to start harvesting soon, are better than last year and prices are likely to be lower than the sales price set in the latest auctions.

If prices remain relatively low, the reserves would be under pressure to reduce their selling price in any future sales, increasing already substantial losses on the fibre that was bought at prices well above the market.

"We really have no idea what they're going to do with the balance. They must be scratching their heads in Beijing," said another trader.