BEIJING - Soaring cotton prices in China, together with appreciation of the yuan, have put tremendous pressure on the textile and clothing industry and may lead to further industrial consolidation, analysts said on Thursday.

September-delivery cotton traded on the Zhengzhou Commodity Exchange, one of the four major exchanges in China, jumped to a record 34,870 yuan ($5,299) per ton on Feb 17.

In the international market, cotton prices surged by 28 percent to $4,927 during the six-week period that ended Feb 18.

"Pressed by surging cotton price, revenue of Chinese companies (in the textile and clothing industry) has further narrowed. Many of them now refuse to take long-term orders, for fear of losing the profits to future increases in raw material prices," said Xu Chonghua, an analyst with Jinshi Futures Co.

Xu said rising labor costs and appreciation of the yuan have made the competition fierce among companies, both at home and abroad.

"Orders are beginning to flow to countries such as Thailand, Vietnam and India, where the labor cost is lower, and product prices are more competitive," he said.

As of Feb 24, the yuan had appreciated by 3.8 percent since last June when authorities removed the peg on dollar.

Meanwhile, Vietnam has depreciated its currency by 9.3 percent, the fourth time in 15 months, which has made Vietnamese products more competitive in prices.

Wu Rongjiang, director with the local government in charge of the childrens' garment industry, in Zhili, a town of textile products, in Huzhou, Zhejiang province, said the overall cost, including increases in cotton prices and labor, has grown by 20 percent.

Zhili is home to more than 7,000 textile factories and companies and the largest production base for children's garments in China, taking up about one third of the market share.

"Children's garments sales are very small. The rising cotton price has seriously affected our production and sales," Wu said.

"To avoid potential risks (posed by the high cotton price), many small businesses have suspended production, and have begun taking manufacturing orders for large companies," he added.

Yet, there are companies that remain unaffected by the rising cotton prices and optimistic about future prospects.

"Our overall costs have grown by about 10 percent, including rising labor costs and cotton prices," said Rong Jie, assistant manager with Ningbo Weinuo Fashion Manufacturer Co.

"At present, we have not seen anything affected by the growing costs," she said.

China imported 3.27 million tons of cotton in 2010. In January, the import volume of cotton jumped by 31 percent year-on-year to 392,000 tons, according to the General Administration of Customs.

The sowing area of cotton is expected to expand by 9.8 percent from last year to 5.64 million square meters, according to a report released by the China Cotton Association in January. However, analysts predict there may still be a cotton supply shortage of 3 million tons in China this year.

China Daily

(China Daily 02/25/2011 page14)