(Reuters) - Switzerland's Glencore Xstrata Plc will scoop up more than half of U.S. cotton exchange stocks, a purchase worth more than $150 million, in the commodity trader's biggest push into fiber since losing $300 million in the volatile market three years ago, U.S. traders said on Wednesday.
In what exchange data showed was the largest delivery for a July contract in at least five years, the firm will take almost 400,000 bales of cotton against the July contract that expired on Tuesday on ICE Futures U.S., according to traders who declined to be identified by name because they were not authorized to speak to the media.
The deal effectively removes more than half of certified exchange stocks from the market, potentially fueling concerns about dwindling U.S. supplies and a small U.S. crop due to a drought heading into the 2013/14 season on Aug. 1.
Nick Gentile, senior partner of commodity trading consultancy Atlantic Capital Advisors, said there could be "fireworks" if near-term supplies continue to tighten.
It is not thought to be Glencore's first foray into the exchange stocks, but its presence is still significant as many deliveries have been taken up in recent years by Cargill and Louis Dreyfus, which have a bigger presence in cotton.
It is rare for smaller players to take delivery from the board as it requires deep pockets, vast storage and logistics operations.
For Glencore, the purchase gives it a large tonnage with which to compete with the bigger rivals. The purchase represents about a fifth of the cotton it sold in 2012.
A spokesman for Glencore, which is headquartered in Baar, Switzerland, declined to comment.
Traders said Glencore has booked sales, most likely in China or elsewhere in Asia, against the purchase in compliance with a hedging exemption rule designed to ensure that speculators do not artificially manipulate the futures market.
The sales will underscore expectations that demand from China, the world's biggest textile market, may remain robust even as the government looks to adjust its stockpiling policy. The United States is the world's No. 1 cotton exporter.
The move also marks a comeback for Glencore from the turmoil of 2011 when wild prices caused an unprecedented wave of defaults, shredded trust among traders, hundreds of millions of dollars in losses and triggered a high-profile personnel change.
It is also the firm's biggest public move since it installed Colin Iles, who handled cotton trading for Cargill from 2008 through 2011, to restore the desk in June 2012.
Iles, who is based in Stamford, Connecticut, replaced Mark Allen, who left in the wake of the 2011 turmoil.
Few players were unscathed by whipsawing prices, but merchants, which act as agents between growers and mills, were hit hardest as customers ripped up contracts as prices rose to highs above $2.2 per lb and sank below $1 almost as quickly.
Both Noble and Olam said cotton's volatility hurt earnings during 2011.
Though the International Cotton Association has said contract defaults are stabilizing after hitting unprecedented levels, traders still fear counterparty risk.
RELATIVE NEWCOMER
Glencore is a relative newcomer compared with the more established players in the clubby cotton market centered around Memphis, Tennessee. Louis Dreyfus' U.S. unit Allenberg was founded in 1921.
Cotton represents just a sliver of Glencore's agricultural business, the smallest of its three marketing divisions with earnings of $361 million in 2012, just 8 percent of the group $4.5 billion total, which is dominated by metals and mining.
The company sold 500,000 tonnes of cotton, or about 2.2 million bales last year, according to the 2012 annual report.
That compares with a global cotton trade of about 9.8 million tonnes in 2011/12 crop year, according to estimates from the International Cotton Advisory Committee.
Traditionally its larger competitors have secured supplies by owning stakes in growers co-operatives and have long-term relationships with ginners.
DECLINING U.S. SUPPLIES
The delivery is expected to slash certified exchange stocks by more than half and add fuel to prices that have risen on concerns about tightening U.S. supplies and pushed nearby prices on ICE to a premium above future contracts.
"Only some remnants of the current certified stock may survive until December," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant, in a market note.
Newedge USA LLC is the receiver of 2,882 lots of a total of 2,943 lots, according to the most recent ICE data, said to be acting on behalf of Glencore.
Noble Group and Louis Dreyfus are among those delivering the cotton, traders said. Both companies declined to comment.
While the delivery may affect availability, traders do not expect it to be as explosive as in July 2011 when soaring futures prices triggered allegations of manipulation.
Ex-Glencore trader Allen has accused Dreyfus of squeezing the July contract, in one of the highest profile commodity manipulation lawsuits in more than a decade. Louis Dreyfus has denied the allegations.
