Mainland cotton exports to gain from small price rise
Reduction in plantation area will boost fabric and yarn costs in the second half
An anticipated moderate rise in China's cotton prices this year will spark a rebound of cotton textile exports and benefit mainland and Hong Kong firms ravaged by price volatility last year.
Prices are expected to be 'relatively high' in the second half, as China's plantation area will shrink 10 per cent to 12 per cent this year, according to Kim Eng Securities.
Cotton prices in China would rise 'an acceptable amount' to 13,000 yuan per tonne later this year from 11,000-odd yuan per tonne, predicted Zhang Bo, chairman of Weiqiao Textile, China's largest cotton-textile company.
'A steady growth benefits cotton-textile companies like us, because we can sell at higher prices, but price volatility hurts everyone in the industry,' Mr Zhang said. 'This year's price increase won't be so high as to squeeze textile and garment firms.'
He said higher cotton prices and the end of global textile quotas in January would significantly boost Weiqiao's exports to the United States and the EU this year. Last year, the mainland firm's exports to the US and Europe jumped 180 per cent to account for 9 per cent of its turnover of 11.09 billion yuan.
'The end of quotas will benefit us, as we no longer have to pay for quotas to export to the US and EU, thus lowering the cost of our exports. As the EU and US are high-end markets, they yield higher profit margins,' Mr Zhang said.
China's export of cotton fabric and yarn should rebound this year, said an analyst. Last year, high cotton prices in the first half caused a 5 per cent drop in cotton fabric exports and a 10 per cent drop in its cotton yarn exports.
Overseas markets will find China's prices competitive this year, as the predicted cotton price of 13,000 yuan per tonne this year is lower than prices in the first half of last year, which ranged from 15,000 yuan per tonne to 18,000 yuan per tonne, the analyst said.
High prices early last year crushed textile firms such as Fountain Set (Holdings), whose net profit fell 31.9 per cent for the six months to February last year.
'Expectations of higher cotton prices are likely to result in higher fabric prices. As long as the rise is gradual, the industry should be able to pass on the increase,' said Gordon Yen, assistant to the chairman of Fountain Set.
'We don't anticipate the kind of sharp increase we saw in 2003,' Mr Yen said.
Mr Zhang said last year's cotton-price volatility cut Weiqiao's gross profit margin to 16.8 per cent last year from 18.5 per cent in 2003. Kim Eng Securities noted Weiqiao's product pricing was 'unstable' last year.
Nonetheless, Weiqiao's net profit rose 52.4 per cent to 825.53 million yuan last year, while turnover rose 69 per cent to 11.09 billion yuan.