SHANGHAI - The volatile price of cotton is making times harder for China's textile industry, which has already been squeezed by higher labor costs and the appreciation of the yuan.
Many textile makers, especially smaller concerns, increased their stock of the raw material last year to hedge against the possibility of surging prices. However, a nosedive in the price of "white gold" since April has subjected them to massive losses.
"No one had expected the cotton price to plunge so sharply in such a short time. The stockpile we had built up to counter higher prices has now become a problem," said Xu Shengye, a sales director with Anhui Taiye Import & Export Co Ltd, a textile manufacturer and exporter.
The price of cotton has been a rollercoaster ride during the past year: It came close to 30,000 yuan ($4,629) a ton by the end of 2010 from 17,000 yuan a ton in May. However, after reaching a record 35,000 yuan a ton in February, the price has since slumped around 30 percent to approximately 22,000 yuan a ton this month.
Xu said the losses rendered by stockpiling have dragged his company's profit margin down to 5 percent from the usual 10 percent.
"Orders keep coming in, mostly from Europe, but now we are reluctant to take them because profit has become so thin and the market so volatile, that we could end up working only to lose money," Xu said.
In April, textile makers' cotton stocks jumped by the equivalent of 13.1 days of production from a month earlier, the highest since March 2009, according to a monthly cotton industry survey conducted by China National Cotton Reserve Corp (CNCRC), the State-owned manager of the country's cotton reserves.
In May, stocks dipped slightly to an average of 38.1 days, but is still 6.4 percent higher than the average for the last three years, according to the survey.
The Changjiang Times quoted Li Shilin, the owner of Wuhan Linsheng Textile Co Ltd, as saying that he has lost more than 1 million yuan because of the recent plunge in cotton prices.
Li said his company bought "several hundred tons" of cotton at around 30,000 yuan a ton last year and is now finding it hard to clear the stock even at discounted price, according to the newspaper.
Earlier this year, Kong Jun, an analyst at China Jianyin Investment Securities, wrote in a research note that the volatile cotton price threatens to cut into the already thin profit margins of small and medium-sized textile makers, which have a relatively unstable supply of the raw material.
He added that suspension and curtailment of production has been "widespread" among small and medium-sized textile makers.
From January to April, China's exports of textile products increased 34 percent to $28.9 billion, according to figures from the General Administration of Customs.
Meanwhile, textile makers' profits, especially those of smaller producers, have been increasingly squeezed by higher costs and the appreciation of the yuan, according to a report by the Ministry of Industry and Information Technology on June 2.