China Textile Makers Said to Renege on Cotton Orders

By William Bi

Nov. 27 (Bloomberg) -- China's textile producers and cotton traders have reneged on purchase contracts for as much as 20,000 metric tons of overseas cotton after prices plummeted in the past three months, two global trading executives said.

As many as eight Chinese companies have failed to follow through on purchase agreements with merchants, and the trend may widen as the industry struggles with worsening demand and credit, said the executives, who declined to be identified as they are not authorized to speak to the media.

Cotton has plunged 33 percent since the end of August as hedge funds sold commodities to cover losses, while global recession concern cut demand for products from clothing to shoes. The cancellations by China, the biggest buyer, amount to about 1 percent of imports in the first 10 months of the year.

``Some Chinese cotton users initially tried to delay the contracts when prices began to fall,'' said Zhu Xuesong, general manager of China operations at merchant Ecom Trading (Shanghai) Corp. ``When prices really plunged, they were caught with losses'' they found difficult to accept.

Zhu Lanfen, vice president at the China Cotton Textile Association, said she had heard complaints from merchants about some producers. Yet her group, which represents 400 of China's 2,000 textile companies, is not aware of any members canceling.

``It's conceivable that some of the less-established companies may default given the difficult financial situation that they face,'' she said. ``But they are not going to come and tell us that.''

Break-Even

China's textile producers operated near break-even point this year because of the appreciating currency, falling export rebates and tightening bank credit, Ecom's Zhu Xuesong said in an interview.

``I can understand the difficulty they face,'' said Zhu Xuesong. While none of his customers' has reneged on contracts yet, and the actual defaulted cotton may be small relative to China's total purchases, ``the defaults are contagious: they have prompted some buyers not to carry out their contracts to go with the crowd,'' he said.

China's cotton imports fell 8 percent in the first 10 months of this year to 1.9 million tons, customs data showed.

Cotton users are halting orders from the U.S., the world's biggest exporter, at the fastest pace in at least a decade as the economic slowdown erodes demand from China.

Order Delays

Delays, cancellations and order reductions of U.S. upland cotton by foreign buyers rose almost sevenfold from a year earlier to 329,600 running bales (74,752 metric tons) in the first 13 weeks of the marketing year that started in August, data from the U.S. Department of Agriculture show. The level is the highest since at least 1998. A bale weighs 500 pounds.

Some merchants have applied to dispute arbitration bodies, such as the World Cotton Exporters Association, or the International Cotton Association, to seek remedies, the trading executives said.

Jiangsu Zhongheng Textile Co. and Jiangsu Sumec Technology Co. were two Chinese companies added to the so-called default list on the American Cotton Shippers Association Web site this month. The group names the parties if no adequate response is received in 15 days, according to the Web site.

Price Jump

Miao Ying, general manager at Nanjing-based Jiangsu Sumec, said the size of the order was about 500 tons and the company will contest the allegation. ``The dispute is not caused by the price changes,'' she said in a telephone interview yesterday.

Kuai Dawen, general manager at Jiangsu Zhongheng, couldn't be reached immediately at a number provided on the Web site of the Ministry of Commerce. Shi Jianwei, executive vice president at the China Cotton Association, declined an interview request.

Cotton jumped 6.4 percent to 46.55 cents per pound on ICE Futures U.S. in New York yesterday.

To contact the reporter on this story: William Bi in Beijing at wbi@bloomberg.net