No soft landing for these African countries as key buyer of continent's cotton cuts orders

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The cash crop had been one of those that escaped the rout in commodity prices, but the pain could be coming home.

CHINA, the world’s largest cotton user, will import less fibre this year and that will be bearish for global prices, according to the International Cotton Advisory Committee.

Such a scenario will hurt several African countries that are exporters of cotton, adding to the pain China, the continent’s largest trading partner, has inflicted on the region’s finances.

Overseas purchases by China will tumble 33% to 1.2 million tonnes in the year that started August from 1.8 million tonnes a year earlier, the committee estimates. The Asian nation will instead increase imports of cotton yarn from countries including Vietnam and India, Rebecca Pandolph, a statistician at the committee known as ICAC, said in an interview in Mumbai on Monday.

“I don’t think it is likely that China will ever come back to the market with imports in large quantities as it did in the past,” Pandolph said. “The anticipated drop in imports is visible in significantly lower imports in recent months. A drop in imports by China will have a bearish effect on global cotton prices in 2015-16.”

Africa’s raw exports

Because Africa exports most of its cotton unprocessed, it will be unlikely to directly benefit from China’s change of tack, and will hope the Asian giant’s new source markets themselves turn to Africa to meet demand from China.  

Cotton has gained 6.7% this year to withstand a rout in commodities from copper to crude oil and nickel as an economic slowdown in China erodes demand for raw materials. Global cotton prices will average about 70 cents a pound in 2015-16 and trade in a range of 61 cents to 82 cents, Lorena Ruiz, an economist at the committee, told an industry conference in Mumbai on Tuesday.

“Prices are not doing better as consumption is not increasing as expected on lower economic growth globally,” Ruiz said. “We were expecting cotton consumption to increase.”

China’s cotton imports dropped 49% to 42,100 tonnes in October from a year earlier, according to industry website Cncotton.com. Barclays Plc said in September China may stop importing cotton by 2018, and may become a net exporter the following year as the nation’s textile industry shrinks amid foreign competition and cheap polyester prices.

With consumption slowing, world cotton imports are forecast to decline by 3% to 7.4 million tonnes in 2015-16, a fourth straight decline after peaking at 9.8 million tonnes in 2011-12, the committee estimates. Still, imports are rising in countries including Vietnam as more spinning mills are opened with investment from some Chinese companies, Pandolph said.

Hardest hit

Overall, 37 of 55 African territories produce cotton, but overall the continent is a small player globally. However, for the major producers, cotton accounts for a significant share of their GDP—in 2011 48% of Mali, 31% of Togo’s and 16% of Benin’s exports by value were based on cotton, according to the International Trade Centre. 

The continent’s cotton however suffers from an unfair perception that it is lower quality and lower yield, the Centre says.

Africa will hope some of China’s increased investment announced at the recently-concluded Forum on China-Africa Cooperation (FOCAC) trickles down to building its industries’ capacity to change its terms of trade globally, or beat out obstacles such as rich country subsidies.

The hardest-hit exporters are from Francophone Africa, which accounts for 75% of production on the continent, according to ICAC data. 

Burkina Faso, for which cotton is the country’s most important cash crop, leads the pack and a decline in public revenue could slow the recovery following a period of political instability precipitated by the ouster of veteran leader Blaise Compaore last year.

Mali and Ivory Coast, the next two largest growers and exporters on the continent, are also rebuilding politically, and could take a hit, as would Egypt, which exports the continent’s densest bales. Benin and Cameroon will also be watching the situation with concern.

But as with any losses there are also gains—countries on the continent that import cotton would likely benefit from lower prices, but only three are significant players, with South Africa accounting for over half of imports—at 19,000 metric tonnes. DR Congo imported 8,000 tonnes in 2013/2014, while Ethiopia brought in  6,000 tonnes.

They are however dwarfed by the scale of imports from China, which imported 1.8 million tonnes over the same period, and Europe’s 1 million tonnes of the global total of 7.6 million tonnes that was shipped.

So your jeans could cost less, as would your mattress and a lot else that uses cotton, but expect currency depreciations and taxes on the continent to take it all away. 

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