My thoughts on cotton textile companies

The cotton textile business is a cyclical business. I think we are at or near the peak of the cycle right now. Even at the peak, the Chinese cotton textile firms are all doing fairly miserably because the Chinese govt’s policy of stockpiling cotton to benefit the farmers. Some say it doesn’t even benefit the cotton farmers because the govt only purchase processed cotton from downstream companies, therefore the money goes directly to these companies. Clearly there is a lot more politics involved than business sense. With the govt destroying the natural market forces, those Chinese cotton textile firms who moved out benefited enormously from this cotton price gap.

Even though some rumours have been released about removing the cotton stockpiling policy, I don’t think it would benefit local cotton firms much right now. Since we are at the peak of the cycle, it is likely they will only be benefited from the next cycle, which is not now. On top of that, a removal of the stockpiling policy would send international cotton prices tumbling to new lows. Cotton firms will evidently earn a smaller gross margin as they need to digest their expensive cotton inventory. Even if they do benefit from the next cycle, rising labour costs and other costs in China will also cause a major problem for the Chinese cotton textile firms. So, the only way to earn a premium in this industry is to move the %^&* out of China. (Or use some sort of very capital intensive new technology that no small firms can attain to reduce cost and increase efficiency in their production chain. I’ve read some magazine about boiling water in this industry uses a lot of energy and there is a method to stop this waste.)

I am not sure if I am right, especially about the industry cycle, but come read this post again a few years later and verify.


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