China's support for cotton farmers is weakening its lead as a consumer of the crop, leaving its mills struggling to compete with foreign rivals able to buy the fibre more cheaply
"A geographical shift in cotton mill use from China to other Asian countries is currently underway," the International Cotton Advisory Committee said.
The dynamic reflects a Chinese policy of guaranteeing farmers a price of at least 20,400 remninbi ($3,267) per tonne for cotton, equivalent to nearly 150 cents a pound, more than twice the price New York futures were trading at on Friday.
The Cotlook A index of physical prices, which includes an element of transport costs, stands at 80.30 cents a pound.
"The high local cotton prices relative to the rest of the world have hurt the profitability of Chinese spinning mills," the ICAC said, describing the sector as "weakening".
Other commentators have cautioned that rising labour and energy costs are also squeezing margins.
With the yarn produced by domestic mills relatively expensive, China's textile groups were turning for yarn to imports, which "have increased significantly", rising 74% to 1.08m tonnes in the first nine months of 2012.
In the first five months, imports from Pakistan have jumped 83%, with those from India soaring 166%, from Vietnam adding 74%, and from Uzbekistan rising 69%.
Indeed, while saying that it would "take time" to assess the extent of the shift in Chinese consumption, the committee forecast rising mill consumption in countries including the four states named above, plus Bangladesh, Indonesia and Thailand.
'Bigger picture negative'
The impact on cotton trade will be to see imports - by countries other than China - rebound by 18%, the ICAC, raising its forecast from 16%, representing a potential support to prices.
The committee lifted its estimate for world imports overall by 370,000 tonnes to 7.70m tonnes, although this figure is still down 2.0m tonnes year on year, reflecting the end of a Chinese stockpiling programme which supported trade, and world prices, last year.
However, with production hopes raised by favourable weather in some producing countries, and Chinese consumption waning, the ICAC also lifted its forecast for world stocks at the close of 2012-13, to a record 16.39m tonnes, a potential depressant to values.
Indeed, Luke Mathews at Commonwealth Bank of Australia said that while "encouraging US and Chinese economic data" had been offering some recent support to cotton prices, "the bigger picture remains negative".
Cotton futures for December nonetheless rose 0.4% to 70.47 cents a pound in early deals in New York.