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China to start cotton reserves sale on Friday, demand seen weak

A worker fills a vacuum pipe with cotton to clean it at a cotton processing unit in Kadi town in the western state of Gujarat, India, on Feb 9, 2015

[BEIJING] China will kick off sales from its cotton reserves on July 10, according to a statement from the stockpile agency, but traders warned demand was likely to be poor given the inventory available in the market and relatively high state prices, now at a premium to futures.

The September cotton contract on Zhengzhou dropped by the maximum allowed daily amount on Wednesday amid a broad commodities sell-off sparked by stock market turmoil in China.

Chinese share prices have plunged more than 30 per cent since mid-June and investors are withdrawing money from commodity markets, which are more liquid than stocks and face fewer government restrictions, traders said.

That has helped push Chinese cotton futures to a significant discount to the reserves' benchmark prices and will make state sales of fibre "a challenge", said a trade source who declined to be identified.

China's top economic planner said last month it would release 1 million tonnes of fibre from state stocks as part of a plan to gradually reduce its bulging reserves.

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The auctions, which will run until Aug 31, will include 330,000 tonnes of domestic cotton from the 2011 crop, 470,000 tonnes from the 2012 crop and 200,000 tonnes of imported 2012 crop cotton, with benchmark prices ranging from 13,200 yuan ($2,126) per tonne to 15,500 yuan per tonne.

China National Cotton Reserves Corporation said in its statement published late on Tuesday on that cotton could be discounted by as much as 2,400 yuan for very poor quality grades.

However, much of the fibre will still be offered at a premium to domestic futures, which fell as low as 12,205 yuan a tonne on Wednesday.

China has built up a massive hoard of 11 million tonnes of cotton, around half of the world's stocks, after Beijing bought up more than 80 per cent of the domestic crop between 2011 and 2013 to support growers.

It halted annual state sales after overhauling its stockpiling programme last year and officials have repeatedly said they would only sell off stocks into a stable market.

While the upcoming sales will offer a much smaller volume of fibre than in previous years, news of the auctions still sent global prices tumbling on fears that adding supply to the market would further depress demand.


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