Chasing the Chinese Dragon

Australian cotton industry watching as China backs off cotton agreements. Genevieve McAulay

Published on: Jul 20, 2004

LOSSSES to the global cotton industry could run into hundreds of millions of dollars with news that China has begun reneging on a wad of forward contracts.

It appears Chinese mills are failing to honor contractual agreements entered in to prior to the Governments Credit squeeze and during a period when cotton prices were trading at 70 to 80-cents per lb.

The U.S. cotton industry alone is rumored to have seen contract defaults on as much as 300,000 tons of cotton - a staggering $100 million loss.

While most Australian merchants are hesitant to discuss individual experiences chair of the Australian Cotton Shippers Association (ACSA) Gordon Cherry has confirmed that several of their members have complained of problems with contracts in China.

"Australian shippers have seen a lot of delays and certainly some members have recorded situations that now appear to be a default," Cherry says. "There is a cause of action if we were trading under Liverpool Cotton Association rules, but the situation here is a little more complex."

While the majority of the global cotton community agrees to adhere by the rules of LCA by its own admission China refuses to trade under this globally recognized contract.

Cherry believes the mood of ACSA members is that they will be seeking some form of compensation.

"I think members will be pursing these situations through arbitration," he said.

"Certainly we have avenues through the World Cotton Exporters Association's default list.

"Under normal circumstances we could expect some success, what we are able to achieve in China I am not sure."

Had these contracts been under the LCA an arbitration form could be lodged with Liverpool and provided they were happy with the complaint an award is given.

The process in China may not be that simple and would involve going through some sort of Chinese legal avenue. Trouble started in May after the Chinese Government, in an effort to curb economic growth, placed credit restrictions on a number of industries including the thriving textile market. Cherry says the restriction of credit plus the slump in cotton prices has been the catalyst.

"With the deregulation of the Chinese market we always realized that we were at risk of this happening. China, however, uses 35% of the world cotton so it is not a market we can stay out of just because we know it is risky."

The only saving grace for the Australian cotton industry is the fact that drought had halved the crop. "I think this year with little cotton to sell we can all be a bit thankful, but certainly the current situation is only exacerbating future markets as people work to re-hedge cotton that they had already sold," Cherry explains. "This is one of the worst climates for a bear market to trade in and things can become very irrational."