Demand for cotton accelerates, prices may extend gains

July 31 | Updated: Aug 1 2005, 05:53am hrs
Cotton prices may extend 2005s 15% gain as demand accelerates in India, the worlds second-biggest consumer of the fiber, said Sholom Sanik, an analyst and commodity trader at Friedberg Mercantile Group Ltd.

Cotton used in clothing and textiles will climb to 60 cents a pound by the end of 2005, Mr Sanik said in a July 26 interview from Toronto.

Prices reached a 10-month high of 57.59 cents in April on signs of increased demand in China, the worlds largest cotton buyer. Cotton for December delivery rose 0.24-51.7 cents at 11:41 am on the New York Board of Trade.

Given the labor cost advantage available in India for manufacturing cotton products, an increase in the rate of growth of valuable contracts with western apparel purchasers is inevitable, which in turn could create a demand shock and send Indian purchasers to the import market, Mr Sanik said in a July 25 report.

India is already benefiting from restrictions on textile imports from China into the US and Europe.

Li & Fung Ltd, a Hong Kong-based trading company that buys clothing for US retailers Kohls Corp and American Eagle Outfitters Inc, has shifted production outside of China. Were already moving out to Vietnam, India, Central America and Turkey, Li & Fung executive director Bruce Rockowitz said.

India is expected to use 16 million bales of cotton in the season starting August 1, up 6.7% in a year, the US Department of Agriculture (USDA), said July 12. A bale weighs about 500 pounds.

Mr Sanik, 47, trades commodities and does research at Friedberg, where he has worked since 1984. The Friedberg Global Macro Hedge Fund Ltd returned 19% in 2004, compared with an average return of 15% at 10,342 hedge funds.

In May, Mr Sanik accurately forecasted the rally in soybeans and the end of a down trend in sugar, and in November predicted a drop in cocoa prices.

Mr Saniks forecast is more bullish than National Australia Bank economist Luke Chandler, who said gains are less likely because of rising global inventories. Unsold supply after 2005s harvest on July 31, 2006, will climb to 48.95 million bales, the USDA said in the July 12 report. The forecast was up from 44.05 million bales projected in June.

An oversupply is expected to weaken the likelihood of a significant price lift in the 2005-06 season, Mr Chandler said in a July 11 report.

Billionaire investor Wilbur Ross, whose buyout company in 2004 acquired bankrupt textile makers, said in a July 19 interview that prices probably will be flat or somewhat rising. He added, We dont see any big reason for them to be going down in the near term.

Mr Ross has been expanding his stake in textile makers, including a $50 million garment plant in China, creating what he said, he hopes he will be the first truly global and very large textile producer.

Global cotton supply will drop 9.4% in the season starting August 1 to 108.6 million bales, falling short of consumption by 3.16 million bales, the USDA said. Output exceeded use by 11.71 million bales in the current season.

Cotton prices have climbed in 2005 on surging demand from China.

Demand was much stronger than expected early in the season, and that demand may very well continue to surprise, Friedbergs Mr Sanik said.

Even the decline in cotton demand by US textile mills, which have lost business to overseas competitors, is not quite the rate expected by the market, he said. It is difficult to say if US mill consumption would survive the next wave of increases in Indian mill consumption. Chinas exports of underwear and cotton knit shirts reached their annual US caps on July 9, and quotas on cotton trousers ran out on July 13, according to US Customs & Border Protection figures.

Even though Chinas textile imports are now limited, there are no limits on India or Pakistan, said John Flanagan, president of cotton trading company Flanagan Trading Corp in Fuquay-Varina, North Carolina.