It has been 40 years since China began opening itself to the world and yet still today there is no official cotton consumption statistic which is reliable. Great private work, such as Cotlook Beijing or CN Cotton, offer the best estimates but there is no reliable estimate available such as that once released by the US census bureau.  Multiple counting in surveys, avoidance of taxes and the desire to meet government set targets all have made China’s data extremely unreliable. There had been great progress underway until the current administration made financial reporting subject to the party where any released reports were required to fit the official party line. The USDA estimated Chinese cotton consumption would reach 42.5 million bales or 3.5416 million bales a month while Cotlook Beijing estimated consumption at 39.972 million bales or 3.333 million bales a month. Some evidence and discussion among spinners suggests that in October and November cotton usage fell below both estimates.  This coincides with the collapse of the Chinese man-made fiber and textile market in mid to late October. There is clearly an art to managing a cotton spinning enterprise and a textile business in China and the spinners almost appear to have a sixth sense as to when business conditions change, like they have wide underground network which can provide information of pending change in policy. Their ability to do this over the years has earned our respect as it is all done in an absence of transparent rules and policies and always subject to the whims of Beijing.  It will probably never be clearly known what caused the sudden panic in the textile market in mid to late October but from our observation it was a combination of the difficulty in obtaining credit and the disappearance of orders past December. Order books are strong through year end and shipments have surged as buyers want all products out before a possible round of 25% or more tariffs on January 1^st. In addition, man-made fibers were influenced by a collapse in oil prices, however, most products fell even further than crude oil.

The collapse in polyester and man-made fibers we discussed in detail in our last weekly and have continued but at a much slower pace. The standard polyester staple fiber price in China has fallen below 58 cents. Cotton yarn prices have slowly been eroding daily demand for raw cotton and reducing margins, which are still slightly profitable. Cotton yarn imports have also damaged cotton use as offering prices of Indian and Pakistan yarn has undermined local yarns. The reduction of the percentage of Reserve stocks used in bale lay-down mixing has further reduced margins. In July and August Chinese cotton yarn spinners of 32s carded yarns enjoyed a slight advantage over Indian yarns of the same count but now the Indian yarns have more than a 900 RMB a ton price advantage. Last week Pakistan exporters were aggressively offering open end yarns. It appears the large imports of cotton yarn earlier this year led to a buildup of unsold stocks. October cotton yarn imports slowed to 140,000 tons which represented a 16.9% YOY decline but was off sharply from May’s imports of 210,000 tons, which was the highest in 9 years.  Unsold imported yarn stocks at ports appear to be more than 60,000 tons. Importers are under pressure to sell these stocks to free up capital and due to a lack of available credit.

The cotton/polyester staple fiber spread in China has reached one of the widest levels in years at near 6600 RMB a ton, premium cotton, which is up sharply. Polyester staple fiber plants are cutting operations and delaying any new capacity from coming online but the cutbacks have not yet brought much stability to prices. The weakness is throughout the petro chemical supply chain. Comment after comment indicates that a large amount of capital is tied up in un-sold petro chemical stocks, including polyester fiber. Most products now have a negative profit margin. Polyester filament yarn prices have fallen sharply again last week as spinners attempted to reduce stocks. POY 150/D 48 has now plunged more than 35% in value since the September price levels. The feedstocks are also under pressure.

The weakness is also occurring downstream at the weaving and twisting mills. Plant capacity rates at weaving mills are estimated at 65% compared to over 80% a year ago. At twisting plants capacity rates have fallen to 60% as compared to nearly 90% a year ago.  Apparel companies are also feeling the pinch reporting an increase in unsold inventories. Many companies are reported to have hoarded inventories expecting strong demand for the first half of 2019 which has not occurred. Compare current conditions with the robust order books the first half of 2018. This aligns with the front-end loading of orders ahead of the expected tariffs. Regarding fabric, Chinese exporters are pushing exports into non-US markets as the 10% duty has already been applied to most fabric exports to the US. Viscose fiber grey fabric exports are being pushed to Thailand, Eastern Europe, Africa and Burma.

These conditions have sharply weakened demand for the 2018 domestic crop and for imported cotton.  Ginners are reporting a buildup in stocks resulting in offering levels of the domestic crop are eroding slowly every day. Ginners have reduced seed cotton prices to reflect the weaker prices. The China Cotton Index for a Middling 1 3/32 or 328 has fallen to near 101.50 cents a lb. while polyester staple fiber prices are below 58 cents. This compares to the average cotton Middling 1 1/8 import offer which is now near 87-88 cents after 1% import duty. Indian cotton is being aggressively offered in China with its cheap freight rates a clear advantage but mill interest is still light.

The collapse in the Chinese textile complex and slowdown in Chinese cotton demand has coincided with a severe decline in two other key industrial commodities - Iron ore and steel rebar. Both of these commodities are used as a benchmark for the health of the Chinese economy and it looks as though a possible recession may have begun. Both are traded on China’s futures exchanges and are among the most active of any contract. The price of both had been in a significant uptrend until late October when at about the exact same time the man- made fiber and textile complex peaked they also peaked and began to fall. Iron ore has fallen nearly 19% from its peak, steel rebar more than 14% and copper has also been under pressure. Iron ore and steel rebar weakness is occurring as construction demand from the real estate sector has declined.  Steel production was one of the major drivers in China’s economic success story, in 1978 China accounted for 4.4 % of global steel production and recently data indicates Chinese currently produces 50% of total global production. Construction, machinery and auto production were the three big reasons for their dominate position. Notices are appearing in some factories, including some hiring migrant workers, stating operations will be suspended for the holidays from December through March.  This of course would have significant economic consequences since it is from December 1, 2018 of 2018 to March 1, 2019.

Further evidence of the slow down in the Chinese economy is being confirmed in the sales data of major high-end luxury retailers which now depend heavily on the Chinese consumer. Tiffany has 34 stores in China and even a larger number of stories in regions favored by Chinese high-end tourist. It released its latest sales data last week and the numbers were disappointing sighting slower purchases by Chinese tourist. Its shares dropped 12% and are now down a third from their recent highs.  Cotton consumption in November appears to have fallen sharply below both the USDA and Cotlook estimates and could have reached only 2.5 to 3.0 million bales. It remains to be seen just how long the slump is extended. If the issues persist through the end of 2018/19 then Chinese stocks will be adjusted and import demand reduced. The fact that demand has soften during a peak month of ginning and seed cotton movement suggest the Reserve could enter the domestic market to take up some 2018 crop to give ginners and the PCC in Xinjiang some financial relief. The Reserve needs to rebuild stocks and rotate out the old inventories. If the weaker consumption continues into 2019 then the expected need to return to the international market by the Reserve could be postponed. Purchases by the Reserve remain a tool China could use in trade negotiations.