USDA – China Cotton and Product latest updates

Report Highlights:

In marketing year (MY) 20/21 (August-July), China’s cotton consumption and cotton imports are projected to recover to 8.1 million metric tons (MMT) and 2 MMT respectively, following the COVID-19 related decline in cotton use and imports in MY19/20. This decline was the result of market disruptions and reduced consumer demand for textiles and apparel. Forecast U.S. cotton exports to China are expected to increase in MY20/21 mainly driven by China’s recovering spinning demand and implementation of the U.S.-China Phase One Trade Agreement. Based on forecast higher yield offsetting acreage decline, China’s MY20/21 cotton production is 5.9 MMT, unchanged from MY19/20.

Note: The estimates and forecasts are developed by FAS Beijing and do not represent official USDA forecasts. Exchange rate: US$1=RMB6.62 in 2018; US$1=RMB6.9 in 2019; US$1=RMB7 in 2020.

Report Summary:

China’s marketing year (MY) 20/21 cotton production is forecast at 5.9 million metric tons (MMT), unchanged from the previous year. The forecast is slightly lower than the USDA official figure based on a lower planted area forecast, with acreage projected to fall by about 3 percent compared to MY19/20. Higher cotton yield is achieved on favorable weather conditions, which facilitated good crop growth and maturation till harvest in Xinjiang and the Yellow River region.

Cotton consumption is forecast to grow in MY20/21, reaching 8.1 MMT compared to an estimated 7.35 MMT in the previous year due to a projected recovery in domestic and international demand for textiles and apparel. While both the MY20/21 and MY19/20 consumption figures are relatively low due to the economic impacts of the COVID-19 pandemic, consumption is expected to recover in MY20/21 as consumer confidence improves, pushing up imports. Forecast MY20/21 cotton imports are up to 2 MMT, an increase over the 1.55 MMT in MY19/20, and U.S. cotton exports are likewise projected to increase in MY20/21. China’s cotton imports reached 0.56 MMT during the first 3 months of MY20/21, up 56 percent year on year, including 0.38 MMT of U.S. cotton, 89 percent higher than the same period in MY19/20.

China’s cotton stocks are forecast to fall slightly to 7.6 MMT by the end of MY20/21 from the relatively high level the previous year, when consumption dropped significantly. There is still no publicly available data on the volume of China’s state cotton reserve, which are estimated at about 1.8 MMT. Industry sources report that the Chinese government is likely to source more foreign cotton in 2021 to rebuild the state reserve in terms of volume and quality mix.

I.            Production

MY20/21 production is forecast at 5.9 MMT, unchanged from the MY19/20 estimate mainly due to higher yield offsetting an estimated 3.1 percent area decline. As previously reported, Xinjiang planted area has remained generally stable, while the Yangtze and Yellow River regions have seen reduced planted area as high input costs pushed down farmers’ profits. Total cotton acreage in MY20/21 declined to 3.12 MHa. Forecast cotton yield is up due to generally good weather conditions in both Xinjiang and the Yellow River region since August.

Favourable temperatures and adequate rainfall in most Xinjiang cotton growing areas from August onward facilitated crop development and boll bearing, and measures for prevention/control of diseases and pests have been generally successful. Since September, weather conditions in most Xinjiang cotton areas have been conducive to cotton maturation and harvest, although rainfall and snow with strong winds in parts of northern Xinjiang is reportedly affecting cotton maturation and drying. Weather conditions in the cotton growing region of Gansu province are also favorable, supporting higher yield than in MY19/20.

Most of the cotton areas in the Yellow River region reported adequate temperatures, abundant precipitation, and satisfactory moisture conditions for crop growth. Weather conditions in the cotton area of the Yellow River region has been good since September, supporting cotton maturation and drying. The average yield in the Yellow River region this year is comparable to that of 2019.

In the Yangtze River region, however, yield is down compared to the previous year. Excessive rainfall in part of the region has had an adverse impact on cotton flowering and boll setting through late August. The rainy weather continued in September, impacting cotton maturation and picking. In most cotton areas of Hubei Province, high soil moisture negatively impacted cotton root growth and led to increased cotton leaf shedding and unmatured bolls.

China’s leading industry sources concur that favorable weather conditions boosted cotton yield in Xinjiang and stabilized yield in the Yellow River region, boosting forecast production for MY20/21. As compared to previous forecasted production decline, major sources forecast a moderate growth of production compared to MY19/20.

According to the China Cotton Association (CCA), as of mid-November, the cotton harvest was 70 percent complete in southern Xinjiang, and 100 percent complete in northern Xinjiang and the other cotton-producing provinces. Seed cotton sales were nearly complete by November 8 in northern Xinjiang but are underway in southern Xinjiang. The pace of cotton ginning is faster this year than last, with the Xinjiang processed volume at 2.83 MMT as of mid-November, up 13 percent from the previous year. Processed volume for all other provinces stood at 39,000 tons, 11.7 percent higher than the previous year. The seed cotton price maintains a growing trend with the national average price in October up more than 20 percent compared to the previous year. Industry sources believe excessive ginning capacity in Xinjiang is the main factor pushing up seed cotton prices.

As of November 17, the volume of cotton classified by the China Fiber Inspection Bureau reached 2.36 MMT, of which 2.33 MMT was Xinjiang cotton. Based on the monitoring of classified volume as of early November, overall cotton quality is reportedly lower than the previous year. For instance, white cotton grade 3 and above accounted for 77.7 percent of the total, 6.4 percent lower than the same period the previous year. Likewise, cotton with fiber lengths of 28 mm and above accounted for 77.1 percent of the total, down 15.6 percentage points year on year. Finally, micronaire A+B (3.5 to 4.9) accounted for 53.3 percent of the total, 10.7 percentage points lower the same period in 2019.

II.           Consumption

MY20/21 consumption is forecast at 8.1 MMT, up from an estimated 7.35 MMT in MY19/20. The textile and apparel sector took an economic hit in MY19/20 as consumer spending dropped during the COVID-19 pandemic outbreak. Consumption is expected to rebound in MY20/21 as consumer confidence and spending begin to recover, restoring some of the lost demand in both the domestic and overseas markets. However, global demand is not projected to completely recover from the coronavirus pandemic this marketing year, reflected in lower forecast consumption in MY20/21 compared to MY18/19 (8.1 MMT vs. 8.6 MMT respectively). The main Chinese organizations tracking cotton demand estimate decreased cotton use in MY19/20 and forecast a recovery in MY20/21. Chinese sources forecast an average net growth of 0.5 MMT of cotton use in MY20/21 compared to the previous marketing year.

The Chinese textile sector was seriously impacted by the outbreak of COVID-19 since January 2020. This forced many mills to suspend operations—either fully or partially—through March 2020.

According to industry data, total yarn production for MY19/20 (August 2019 to July 2020) is an estimated 7 percent lower than in MY18/19. However, based on an enterprise survey conducted by the China Textile Industry Alliance, the sector resumed operations gradually and reached a capacity utilization rate exceeding 90 percent by the end of September. Specifically, an estimated 79 percent of mills reported utilization of spinning capacity at 85 percent or above, while 77 percent of fabric manufacturers reported capacity use of 85 percent or above, as of late September. Chinese industry statistics indicate total yarn production was down by 11.5 percent during the first ten months of 2020 compared to the same period the year before, while fabric production was down 14 percent during the first nine months of 2020 compared to the same period in 2019. Yarn production has exhibited a slow recovering trend since July 2020, a pattern that is projected to continue into 2021 if the domestic COVID-19 situation remains stable.

Chinese industry data indicate growth in textile and apparel exports during the first ten months of 2020, with a total value reaching $240.6 billion during that period, up 9.5 percent compared to the previous year. Textile exports in particular surged during this period, logging a growth of 31.9 percent by value driven by strong exports of surgical masks, gowns, and other personal protective equipment. During the months of August, September, and October 2020, textile exports grew by 47 percent, 49 percent, and 14.8 percent respectively compared to the same month in the previous year. Apparel exports remained stagnant through July and grew sporadically in August, September, and October, increasing by 3.2 percent, 38 percent, and 8.6 percent respectively year on year. Looking forward, Chinese industry insiders believe personal protective equipment will continue to drive textile exports, while exports of general textile and apparel products will be constrained by the impact of COVID-19 on global demand. Exports of yarn and fabrics to countries such as Vietnam are expected to slow down and exports to the United States continue to face uncertainties.

Domestic sales of textile and apparel products have been recovering since August 2020, although the total sales value during the first ten months of 2020 is 9.7 percent smaller than the same period in 2019. According to data presented at a National Statistics Bureau press briefing, the total sales value of textile, apparel, hats, and shoes from September 2019 to August 2020 was 11.7 percent lower year on year.

Domestic demand for textile and apparel products is projected to continue its growing trend in 2021 along with the expected recovery in GDP growth.

III.          Trade

China’s MY20/21 cotton imports are forecast at 2 MMT, up from 1.55 MMT in MY19/20 based on an anticipated recovery in spinning use to support the rebounding textile and apparel sectors. Additionally, cotton imports are likely to be boosted by rising domestic cotton prices and the widening price gap between domestic and imported cotton since October 2020. China’s cotton imports reached 0.56 MMT during the first 3 months of MY20/21, up 56 percent year on year, including 0.38 MMT of U.S. cotton, 89 percent higher than the same period in MY19/20.

China’s cotton imports fell to 1.55 MMT in MY19/20, a 26 percent decline year-on-year. However, the U.S. market share expanded to 31 percent in MY19/20, and this surged to over 70 percent in the first two months of MY20/21 partly due to China’s implementation of the U.S. – China Phase One Trade Agreement.

Since bottoming out in May, China’s domestic cotton price has exhibited a growing trend, exceeding that of imported cotton by about RMB1,700/ton (USD 243) at the end of October.

In addition to market demand, China’s cotton imports are subject to how the government administers the tariff rate quote (TRQ). China’s WTO TRQ obligation is 894000 tons of cotton annually, subject to an in-quota one percent tariff and conditioned on processing for re-export. During the last two years, China made additional TRQ available, subject to a sliding duty, to meet demand from the domestic spinning industry. In October 2020, China announced that an additional 400000 tons of cotton TRQ would be distributed to non-state-owned enterprises, subject to a sliding duty. Although cotton use has not fully recovered from the impact of decreased demand in MY19/20, the gap between China’s cotton use and its cotton production is projected to be larger in 2020 than the annual WTO TRQ obligation of 894,000 tons. Based on a forecast supply gap of more than 2 MMT in 2020, it is likely that China will make available a total of more than 1 MMT of additional TRQ in 2020. For an explanation of how China calculates and administers the sliding duty, see GAIN report CH18033.

Unlike cotton imports, yarn imports do not face quota restrictions, and thus serve to fill the supply gap in years when no additional cotton TRQ quota is allocated. Based on weak demand for textile and apparel products, yarn imports fell to 1.8 MMT in MY19/20, down 10.5 percent from the previous year. Given China’s large spinning capacity, Chinese spinners are expected to maintain market share, spurring cotton imports at the expense of yarn imports in MY20/21. Additionally, yarn imports are highly sensitive to the price gap between domestically spun and imported products.  Yarn imports exceeded 0.5 MMT in the first 3 months of MY20/21, up 15 percent from the previous year, mainly due to a price advantage.

As global demands remain weak, yarn prices declined both home and abroad in mid-November, and prices of imported Vietnamese and Indian yarn surpassed that of domestic product yarn. Yarn import growth is likely to level off in MY20/21 on decreasing price advantage. Vietnam continues to dominate China’s market with share at about 48 percent, unchanged from the previous year.

While Chinese end users favor the quality and reliability of U.S. cotton, imports of U.S. cotton have been constrained by China’s additional 25 percent tariff on U.S. cotton. The additional tariff on U.S. products put U.S. cotton at a disadvantage compared to China’s other main cotton suppliers, including Australia, Brazil, and India in the first months of MY19/20. On February 18, China announced a new tariff exclusions application round for U.S. agricultural commodities impacted by the additional 301 tariffs. The announcement enumerates approximately 150 agricultural and agricultural-related tariff lines, including cotton. For more information on the tariff exclusions process, see Updated Guidance on China’s Retaliatory Tariffs and Tariff Exclusions Process for U.S. Products. For information on applicable tariff rates, see the 2020 Cotton and Products Annual.

IV.          Stocks

China’s total cotton stocks are forecast to fall to 7.6 MMT by the end of MY20/21 from an estimated 7.9 MMT in MY19/20, both figures adjusted higher based on market data. Low consumption resulted in relatively higher carry out stocks in MY19/20.

Annual sales from the state cotton reserve began on July 1 and ended on September 30, 2020. Out of 504000 tons of cotton auctioned, 503,000 tons were sold. The high purchase rate has mainly been driven by low, generally stable offer prices. Industry insiders said the sales of reserve cotton is positive as it met the spinning sector’s demand for various grades of cotton and raised the sector’s competitiveness in the market.

On October 20, China announced it will purchase 0.5 MMT of Xinjiang cotton for the state reserve, with purchases slated to begin on December 1, 2020 and continue through March 2021. The daily purchase volume is 7000 tons based on a price slightly above the domestic spot market price. During the purchase period, if the domestic price exceeds the international price by RMB800/ton (U.SD 114) for 3 consecutive days, purchases will be suspended, and will resume when the price gap falls below RMB800/ton. The government’s decision to purchase Xinjiang cotton reflects a low state reserve and intention to boost domestic cotton prices. China’s state cotton reserve level continues to be difficult to predict, however, the current reserve stocks are estimated to be at slightly above 1.8 MMT.