Playing with prices costs cotton reserve 500m yuan

PUBLISHED : Saturday, 15 January, 2005, 12:00am
UPDATED : Thursday, 27 July, 2017, 8:57am

The state-run firm managing China's cotton reserves has lost at least 500 million yuan making wrong bets on prices.

Xinhua, citing China National Cotton Reserves Corp general manager Lei Xiangju, reported the company lost heavily after failing to sell its expensive cotton stocks when prices plunged.

The two-year-old company is the second central government-controlled company to suffer massive losses from speculation in recent weeks following the China Aviation Oil (Singapore) Corp's derivatives trading scandal.

Xinhua said the cotton reserve began amassing cotton in October 2003 to capitalise on the mainland's soaring prices following a poor harvest and rapidly growing demand. Prices rose to 17,500 yuan a tonne by August that year.

The agency, citing unnamed sources, said the company imported at least 250,000 tonnes of cotton for a few months after October, distributing only a small portion to local cotton traders, to further increase prices.

However, since early last year, Beijing has raised cotton purchase quotas by 1.5 million tonnes twice, while austerity measures also pushed prices down to 15,000 yuan a tonne by June last year.

According to the State Statistics Bureau, the country's cotton planting area grew 10.6 per cent to 5.65 million hectares and cotton output exceeded six million tonnes.

'The [cotton reserve] management made a wrong decision,' said Liu Tao, an analyst with the China Futures Association.

'If they can use the hedging on the cotton futures market for the goods they imported and lock the cost to a certain level, they may avoid a complete loss on the actual goods investment.'

Ms Lei blamed the central government's credit tightening last year, which forced enterprises to rein in investments, and the cotton reserve's nature as a policy-manipulating organ without business budgets. The reserve was set up in March 2003 by the central government with a registered capital of one billion yuan.

Authorised by the State Council, it oversees import and export, purchase, distribution, transportation and processing of state cotton reserves and governs the 18 state cotton reserve storehouses in the major cotton producing areas.