The long-anticipated sales from China’s State Reserve began on May 3rd. During the first month of sales demand has been strong with over 97 percent of the cotton being offered finding buyers. As of June 7th, 3.2 million bales (697,000 MT) had been sold.
Foreign cotton, primarily U.S. and Australian, initially represented a majority of the cotton being offered, but the amount of foreign cotton has steadily been reduced and in the first week of June no foreign cotton was offered.
Total sales of foreign cotton have nearly reached 300,000 MT, the reported limit for sales this auction cycle.
Sales are made through a daily auction where a minimum price is set for each lot offered for sale. A floor price is set each week based on the average of the previous weekΆs internal market price and the A-Index.
The minimum price of each lot is the floor price adjusted based on quality. All of the cotton being sold has been regraded and weighed. China announced that sales from the State Reserve would continue until the end of August, and that up to 2 million MT (9.2 million bales) could be sold.
If sales were to continue at the same pace as observed so far, the entire 2 million MT could be sold by the time auctions end in August.
However, even these large sales would represent less than one fifth of the total amount believed to be held in the State Reserve (11 to 11.5 million MT).
Provided that any new reserve purchases are paired with additional sales for rotation, and assuming future auctions are similarly successful, the observed rate of reserve auctions will take at least 3 to 4 years to return stock levels to more typical historical levels.
This represents a slightly faster pace of stock reductions than was anticipated in the FAS circular in June 2015, mainly due to larger-than-expected declines in domestic production. This monthΆs estimates reflect reductions of 1.3 million and 1.0 million bales, respectively, in ChinaΆs 2015 and 2016 cotton production.
