Over the past three months, China has bought more than $ 1 billion in US cotton. However, the second largest economy in the world does not really need this amount of cotton.
The COVID-19 pandemic caused clothing stores to close, so the cotton demand decreased, so China's import of US cotton was affected. According to Bloomberg, the purchases are part of a first-stage trade agreement between Washington and Beijing.
That fact forces China's state-owned companies to hoard the cotton they have bought, making the demand for cotton imports in the future likely to decline.
The first-stage trade deal requires China to buy $ 36.5 billion of American agricultural products this year. This makes the actual demand and the amount of cotton that Beijing has to buy disproportionately, especially when the second largest economy in the world is buying US cotton at the fastest rate since 2013.
More than 50% of defaults reported to the US Cotton Exporters Association last year involved Chinese counterparts. Mr. Jon Devine - chief economist for Cary, Research Cotton Inc. (based in North Carolina state), said: "Recent Chinese purchases have not been correlated with downstream demand”.
Most of that cotton is believed to have been stock in stockpiles. If China moves cotton into stock, it can later be used to meet future demand and make up for new agreements.
The widespread COVID-19 pandemic has devastated the global cotton industry. The fact that many retail giants like J. C Penney and Neiman Marcus Group have to close or go bankrupt is damaging cotton demand.
According to estimates by the US Department of Agriculture, global cotton consumption is expected to decrease by 23 million bales - a record number ever.
Textile mills in China did not increase their orders much in June and 45% surveyed units were losses at the end of June, increased 17% in year-on-year, according to the America Cotton Textile Association.
"While agriculture was deemed critical and essential and supply chains remained open, retail clothing sales suffered immensely due to closures," said Buddy Allen - President of the American Cotton Shippers Association.
That fact caused "Tidal wave of disruption through cotton’s global supply chain creating incredible costs, losses, and risks for participants ", Mr. Allen stressed.
Although Chinese textile mills are struggling, their purchasing power ahead of the trade war and COVID-19 pandemic is remaining "weak".
So far, China has not added import quotas to textile factories as it did in 2019. Meanwhile, Chinese enterprises have canceled their cotton orders from the US in two weeks until 16/7.
China is also selling some of the government's cotton stockpiles to textile factories at lower prices than import prices. All of which suggests that future Chinese cotton purchases in China could stall.
In addition, Brazil - a US rival and cotton exporter to China, is also having trouble. Private enterprises in a billion-population country do not buy cotton from Brazil even though it is much cheaper than the US, said Marco Antonio Aluisio, Vice President of a group of cotton exporters.
However, Mr. Wang Qianjin - head of the information department at the Shanghai International Cotton Exchange, affirmed that China may continue to buy US cotton as the Beijing government is looking for ways to fulfill its commitments in the first phase agreement. Up to now, China is still far from meeting the target.