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China Sourcing Update (Prices of Natural Textile Materials) Dec 2016

1. Cotton price indices drop in December

The price indices1 of cotton dropped in December. The CC Index 3128B, for example, went down from a two-year high of 16,019 on 29 November to 15,779 on 28 December, before rebounding a bit to close at 15,798 on 30 December (see exhibit 1).

The main reasons for the fall in cotton prices in the month include a drop in the prices of cotton futures in China; an increased domestic supply of cotton as more cotton from Xinjiang, the major cotton producing region in China, was transported to other regions; and market expectations of a rise in the future supply of cotton after the Chinese government announced on 22 November that it would sell its cotton reserves again from 6 March to end-August 2017.

Looking ahead, the domestic supply of cotton is expected to increase further in the near term. The upcoming sale of state cotton reserves is likely to exaggerate the downward pressures on cotton prices. Moreover, most textile manufacturers are expected to suspend their production from late January to mid-February (i.e. from a few days before to a couple of weeks after the Chinese New Year), and thus their purchase of cotton will drop significantly. Therefore, we predict that cotton prices will fall further in the coming months.

2. Nanjing Wool Market Composite Index rebounds slightly

The Nanjing Wool Market Composite Index , one of the major wool price indices in China, picked up slightly from 77.22 yuan per kg at end-November to 77.31 yuan per kg at end-December (see exhibit 2).

We believe that the rise in the wool price index in the month was due largely to an increase in wool prices in the Australian market. The Australian Wool Exchange Eastern Market Indicator (AWEX-EMI) rose from 69.56 yuan per kg on 25 November to 69.72 yuan per kg on 16 December (i.e. the last trading day of December). As China imports a large amount of wool from Australia, the domestic wool prices are significantly affected by the wool price movements in the Australian market.

Looking ahead, the domestic demand for wool is expected to remain stable in the near term. Meanwhile, the supply of wool in Australia is forecast to rise in 2016/17, according to the Australian Wool Production Forecasting Committee. All in all, we expect the wool prices in China to stay low in the foreseeable future.

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Content provided by Fung Business Intelligence
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