Chinese imports of Australian cotton continue to strengthen despite (or perhaps as a result of) the continuing chatter of trade wars.
Those who attended the Australian Cotton conference this year, and were lucky enough to listen to Michael Every’s presentation on what he was calling the Cold War between the USA and China, may remember he stated that Australia could not continue to sit on the fence on this matter and that we must pick a side. It is with this in mind I believe it is timely that we review China’s importance to the Australian cotton industry.
If you are skim reading this article then the key statement is that China is back.
The export data as depicted below demonstrates that China is once again the big daddy of buyers of Australian cotton.
While yet to reach the heady heights of 2012, just over 50 per cent of the 2018 Australian cotton crop shipped to date was bound for China. If you include the consumption of Chinese owned mills operating in Vietnam this figure then rises to closer to 70pc of the crop.
Calculating these figures was made a bit harder for us given our primary source of data is generated by the Australian Bureau of Statistics, who unfortunately bent the knee to an unknown party and agreed not to specifically provide data for exports of raw cotton to China and Indonesia.
In providing this opinion of current export estimates we have considered the relative volumes of cotton exported to various markets over the last decade and drawn on outside market intelligence.
If you are interested, the balance goes to mills in Bangladesh who to date have taken 10pc of the crop; Indonesia and Turkey 4pc each while India and Thailand have each taken 3pc of the 2018 shipments to date (ABARES data as of end of September 2018). The remainder has been shipped to a gamut of smaller markets. China’s focus on depleting their strategic reserves of cotton dramatically reduced their imports of foreign cotton over the past few years however, as the recent ABARES export statistics suggest, this may well be drawing to a close.
The USA National Cotton Council (NCC) reported in their latest weekly export sales report (dated week ending November 29, 2018) that cumulative sales of US cotton to China for the 18/19 crop year is at over 1.6 million bales.
This places China as the second largest buyer of US cotton, making up 16pc of the total recorded US sales to date. In addition to this China has already purchased a further 1 million bales for shipment in the 19/20 crop year.
It is important to note that these are sales figures only with the big question being how many of these sales will actually have cotton delivered against them.
At the time of writing this article, cotton imports into China from the US still attract a government induced tariff of 25pc which, if not lifted, is definitely prohibitive to the actual delivery of US cotton against these sales.
Additionally the Chinese mills are for the most part, buyers of high grades and with the current US crop predominately 41 colour or lower this may also play a role in US cotton shipments to China not meeting their current sales.
The spinning mills located in China free trade zones are exempt from paying import tariff on raw cotton. There will be a small fee on the yarn when brought out of the free trade zone however this is minimal when compared to the tariff on raw cotton.
Private sources have estimated total raw cotton consumption of these mills to be in the vicinity of 2 million bales per annum. Shipments to these mills will account for some of the existing US sales of cotton to China.
Chinese free trade zones also contain an inordinate number of warehouses many of which are used to store foreign cotton.
This cotton is stored in these warehouses ‘on consignment’ and is offered to Chinese spinning mills based ex warehouse.
The import tariff on these bales is only paid once the cotton is shipped out of the free trade zone and as such it would be logical to assume that there is a lot of cotton, including both Australian and US sitting in these warehouses waiting for sale to Chinese mills located outside of the free trade zone.
This cotton is recorded as being shipped to China in the figures discussed however it has yet to be actually sold to a Chinese spinner.
It is with some degree of trepidation that I mention the trade war tag given its somewhat current flavour as media fodder and the resulting ever changing views and postulations on this issue.
We do know that shipments of Australian cotton into China are on the rise again with currently over 50pc of all shipments to date sailing to China.
This may well be a result of trade war induced mill focus away from the US. It could also be an anticipation of Chinese Reserve Stock purchasing or a combination of many different market eccentricities.