China mills told to buy more state cotton to get import quotas

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China, the world's largest cotton buyer, will require local mills to buy more of the fibre from its bloated state reserves in exchange for import allowances this year, three sources with knowledge of the matter said on Thursday.

The move, aimed at reducing burgeoning state inventories that now account for 60 percent of global stocks, could weigh on imports and global prices of cotton, especially since Beijing has already slashed sales prices for the fibre from its reserves to narrow the advantage of overseas supplies.

The government will give mills one tonne of import quota under a sliding tariff system for every four tonnes of cotton purchased from the state reserves during auctions from April 1, the sources said.

Government officials were not immediately available for comment.

The ratio was set at 1-to-3 last year.

"It (the policy) has already been decided, but government authorities may not publish the details on import quotas," said one industry source who has been notified of the new rules.

Investors have been closely tracking China's cotton import policies after Beijing announced in December that it will end a three-year cotton stockpiling in the 2014/15 season.

With the government now holding more than 10 million tonnes of cotton reserves after 3-years of stockpiling, there were concerns that a more aggressive state sale programme would hurt imports.

Beijing decided earlier this week to cut the bidding price for its cotton reserves to as low as 17,250 yuan ($2,800) per tonne, causing New York cotton futures to fall on fears that it would stymie import demand.

The cut in reserve sales prices and continued access to cheaper overseas supplies will help mills lower their cost burden, analysts said.

"The actual cost for mills will decrease quite substantially by about 1,000 yuan per tonne," said Dong Shuangwei, chief analyst with Beijing DSW Investment Consulting Co. Ltd.

"Mills may be encouraged to bid more state reserves," he said, estimating that as much as 400,000 to 500,000 tonnes could be sold every month, higher than current level of about 170,000 tonnes.

Textile mills could be given import quotas based on the monthly tonnage bought from state reserves. But with Beijing eager to liquidate its massive reserves, the government may well drag its feet on issuing the import quotas, said one industry source.

Transport Costs

Pressure on China to whittle down its stocks has been growing. China's top agricultural bank has urged Beijing to speed up the sale of its state grain and cotton reserves, now at record high levels, to help ease the bank's mounting debts, state media reported last week.

However, some local traders said it was not immediately clear how the new 4-to-1 ratio would affect import demand, as success of the daily state auction program would also depend on the quality of the fibre.

"Mills in the east will also take into consideration the transportation costs to bring the cotton from Xinjiang and the quality and so on," said a cotton trader.

Most of the state warehouses are located in the northwest region of Xinjiang and transportation by rail to mills in Shandong province costs about 700-900 yuan a tonne, trade sources said, adding that frequent congestion and delivery delays were also headaches for mills located in the east.

The benchmark May cotton contract on ICE Futures U.S. fell 2.6 percent on Wednesday to 91.66 cents a lb. China's cotton futures on the Zhengzhou Exchange stood at 1.5 pct at 15,770 yuan per tonne.

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