Aug. 22 (Bloomberg) -- Cotton consumption in China, the worldΆs largest user, may shrink 11 percent this year as a deteriorating economy hurts demand and causes a buildup in commodities, according to Weiqiao Textile Co.
“The Chinese economy is only at the beginning of a harsh winter,” Zhang Hongxia, chairman of ChinaΆs largest cotton- textile maker, said in an interview in Hong Kong on Aug. 20. “China now is facing a situation where everything from coal to steel inventories are piling up.”
ZhangΆs outlook runs counter to forecasts from banks such as Goldman Sachs Group Inc. that forecast a second-half rebound as the government expands stimulus. ChinaΆs economy grew at the slowest pace in three years in the second quarter as EuropeΆs debt crisis hurt exports and a government drive to cool consumer and property prices damped domestic demand.
“The slowdown in China is due to overall industrial overcapacity accumulated in recent years,” said Lou Zhi, head of the trading department at Hunter Capital Ltd., a Dalian-based commodity hedge fund. “Overseas demand is unlikely to revive soon as the European debt crisis looks set to drag on. Despite a recovery in the U.S., growth there seems anemic.”
Cotton usage may drop to 8 million metric tons this year, compared with consumption of about 9 million tons in 2011, according to Zhang, who had forecast in March that 2012 demand may increase to as much as 9.5 million tons. China accounts for about 40 percent of global cotton consumption.
Benchmark Index
Cotton for delivery in December traded at 76.31 cents a pound on ICE Futures U.S. at 9:56 a.m. in Shanghai after most- active prices tumbled 28 percent over the past year. Weiqiao shares, trading at HK$2.77, have slumped 33 percent in the past 12 months as the benchmark Hang Seng Index advanced 2.3 percent.
ChinaΆs export growth collapsed in July and industrial output fell short of projections, according to separate reports this month, after data showed the second-largest economy grew 7.6 percent between April and June. Premier Wen Jiabao said last week that easing inflation allowed more room to adjust monetary policy. The country has cut interest rates twice since June and the reserve requirement ratio three times since November.
“My view might be in contrast to what many economists out there are saying,” said Zhang, daughter of Zhang Shiping, whose family hold 744.94 million shares in Weiqiao, according to data compiled by Bloomberg. There may be a so-called turning point for the economy if the government introduces “very good” policies later this year, she said, without elaborating.
΅Supportive PoliciesΆ
Goldman Sachs economists including Hong Kong-based Cui Li said in an Aug. 2 report on ChinaΆs economy that “we expect growth to accelerate in the rest of the year and 2013 as supportive policies are gradually rolled out and implemented.” The bank forecast a full-year expansion of 7.9 percent for 2012, down from an earlier estimate of 8.1 percent.
Economic growth may accelerate to 7.9 percent in the third quarter and 8.3 percent in the final three months, according to the median forecasts in a Bloomberg survey of 21 economists taken from Aug. 14 to Aug. 21. The country is the worldΆs largest consumer of base metals and second-largest crude user.
Coal inventories at Qinhuangdao port rose to 9.33 million tons on June 17, the highest since 2008, data from the China Coal Transport and Distribution Association showed. Stockpiles were at 6.69 million tons as of Aug. 19. While steel-product stockpiles at the nationΆs 26 major markets have dropped for five months as the end of July, theyΆre still 19 percent higher this year, according to the China Iron & Steel Association.
Tough Environment
Commodity-related companies have flagged their concern. Noble Group Ltd., AsiaΆs biggest listed commodity supplier, expects a tough environment for the next 12 to 24 months, Chief Executive Officer Yusuf Alireza said yesterday. Vale SA, the worldΆs largest iron-ore producer, said this month that ChinaΆs so-called golden years are gone as economic growth slows.
“We are in a worse situation now, compared with 2008- 2009,” said Zhang, referring to the countryΆs textile industry. “The prospect for an economic recovery looks set to drag on, with too many uncertainties in the short term, and the European debt crisis seems to be endless.”
Weiqiao, which normally consumes about 600,000 tons of cotton a year, used 204,000 tons in the first half as capacity usage was reduced to cope with weaker demand and high inventory, Zhang said. Net income at the Zouping county, Shandong-based company fell about 90 percent in the first half.
Cotton production in China doesnΆt meet demand and the government distributes import quotas. Output may be 31 million, 480-pound bales (6.7 million tons) in 2012-2013, compared with demand of 39 million bales, according to the U.S. Department of Agriculture. Imports may decline to 13 million bales in 2012- 2013, from 24.3 million bales previous year, the USDA says.
Through an industry association, the company has urged the government to either release additional import quotas, enabling textile makers to benefit from cheaper shipments, or to sell off state stockpiles at a discount, Zhang said. The government has more than 4 million tons held in reserves, she said.
