Domestic cotton prices will stay relatively steady with possible slight rises in the near future, while the long-term outlook is unclear, according to a veteran market observer.

"Cotton spinners and textile enterprises' demand for cotton this year has surpassed domestic supply," said Yang Zhaoliang, deputy secretary-general of the China Cotton Association (CCA). "That is the main factor that keeps the price growing."

The cotton price for spot transactions stood at 13,831 yuan (US$1,666) per ton yesterday, according to statistics from CNCotton.com, a leading cotton information portal.

The price was only 12,000 yuan (US$1,445) per ton in January. It has increased steadily since March, and topped 13,862 yuan (US$1,670) in the middle of May. In the past month the spot price of cotton has been fluctuating.

Yang said the gap between cotton production and consumption does exist but may not be as large as previously predicted.

Earlier reports suggested the production-demand gap of cotton could be 3.2 million tons this year.

According to the association's calculations, demand will exceed 8.85 million tons while output is forecast to be 5.76 million tons.

"The output is likely to decrease as the acreage was reduced but specific harvest might not be available until October," Yang said.

China's cotton acreage has shrunk by more than 10 per cent from a year ago as a number of cotton growers were stung by price decreases.

Yang said it was hard to predict the harvest decline this year as the weather must be taken into account.

Cotton buyers have been reluctant to sign big orders in the past few months as a result of textile friction with the United States and the European Union.

However, statistics from CNCotton.com show stockpiles will have to be replenished from July.

Enterprises have regained their confidence in the market since China and the EU reached an agreement over the rate of increase of the country's textile exports over the next three years.

The gap between output and demand is expected to keep the price rise small in the short term.

As the US Government has started to impose curbs on Chinese textiles, cotton buyers' demand for the material will likely drop. This could have a knock-on effect on producers, Yang said.

"All people in the cotton and textile sector, from the upper reaches to the lower reaches of production, are keeping an eye on the Sino-US textile negotiation," he said. "Because only the results of it could probably rule out the uncertainties that remain."

The CCA is preparing to build an early warning system for the cotton market, said Shi Jianwei, a senior association official.

By arming key cotton producers with up-to-date information, the system is expected to help avoid unfair competition and sharpen companies' competitive edge.

"We hope to change the passive situation in the past, when we just looked for solutions to problems that had occurred," Shi said.

Fresh strategies for cotton trading, which aim to strengthen self-regulation and connect the home market with that abroad, have been highlighted by the association.

Domestic cotton prices topped 18,000 yuan (US$2,176) per ton last year but dropped sharply to less than 12,000 yuan (US$1,446) in January, partially because of bad practice.

Yang said the CCA will strive to restructure knowledge networks to create a national information platform.

(China Daily July 1, 2005)