Nov 13 (Reuters) - China is expected to start sales from its huge reserves of cotton as early as this week, trade sources said on Wednesday, increasing supply to the local market and pressuring international prices already steeply off August highs.
China holds about 10 million tonnes of cotton, more than half the world's stocks, after a three-year stockpiling programme, and any move to sell down the state reserves is closely watched in the global market.
Worries that Beijing will unleash some of its bulging stocks has contributed to a sharp drop in prices on ICE, where spot prices dropped to their lowest since January at just over 75 cents per pound last week from near 94 cents in August.
The decline in prices was also fuelled by growing harvest pressure and speculators liquidating bullish positions.
"The warehouses have already started to pack the cotton," said a Chinese trade source. "It's very likely they'll start next week."
The exact timing for the sale is unclear, with traders giving dates ranging between Nov. 15 and Nov. 20. It is also unclear how much cotton will be put up for sale, sources said.
Beijing is widely expected to set its reserve sales price at 18,000 yuan ($3,000) per tonne, about a 70 percent premium over the December cotton contract on ICE.
"The market consensus is that the sales will be priced at 18,000 yuan per tonne," said another trade source.
The price is equivalent to the cost of importing cheaper Indian cotton at full duty and paying for an import quota, said a trader with an international firm in China.
"Mills may prefer a new crop Indian bale than reserve cotton that has been sitting in a warehouse for two or three years," the trader said.
Chinese mills have long complained about the quality of cotton in the reserves and the loss of weight in storage. The Chinese trade source said the upcoming sales will consist of cotton from the 2011 crop, likely of "mediocre" quality.
Chinese mills are still likely to buy, however, as many do not have import quotas and supply in the market is tight, said industry participants.
"Cotton stocks in mills are very low. They're saying they don't have cotton to run beyond November," said the foreign trade source.
Companies with import quotas are also struggling to buy cotton on the international market with little available for guaranteed delivery by the end of the year.
China's cotton reserves bureau typically announces sales two to three days ahead on industry websites.
($1 = 6.0919 Chinese yuan) (Reporting By Dominique Patton in BEIJING. Additional reporting by Chris Prentice in New York; Editing by Tom Hogue)