UPDATE 2-China to issue 1 mln T of cotton import quotas -traders

Fri May 11, 2012 12:28pm IST

* China to issue about 1 mln T extra import quotas

* Zhengzhou cotton futures prices traded limit-down

* Beijing unlikely to release its reserves (Updates futures prices in paragraph 6)

By Niu Shuping and Ken Wills

BEIJING, May 11 (Reuters) - China, the world's top cotton consumer, will soon issue about 1 million tonnes of extra cotton import quotas to help textile mills buy cheaper overseas cotton to cut costs, traders said on Friday.

The extra quotas, which would allow imports at sliding tariffs between 5 and 40 percent, would bring total import quotas issued so far this year to about 2.4 million tonnes, they said.

Traders had expected government authorities to issue the extra quotas and have stockpiled a large volume of cheap cotton at the country's bonded warehouses.

"Some textile mills made some new purchases last week while others are still waiting as domestic cotton prices are falling," said one trading manager at an international trading house.

"Demand from textile mills is sluggish, some are running at only 30 to 40 percent of production capacity due to fewer export orders," said the manager.

The expectation of a large increase in imports has pressured local futures prices. The most-traded September price was traded down to its daily limit of 4 percent in the afternoon session at 19,685 yuan ($3,100) per tonne, the lowest level since September 2010.

The market also tracked weaker U.S. cotton prices overnight. New York cotton prices closed down the daily limit and at their lowest in nearly two years on Thursday after the U.S. Department of Agriculture (USDA) forecast record world cotton supplies in 2012/2013.

Even so, domestic cotton is still more than 10 percent higher than the same quality international cotton supplies.

"There are not many high-quality cotton supplies available from the U.S. market and premiums are high as well. Indian cotton is of low quality, we expect new sales from Brazil will pick up," said another cotton executive.

The International Cotton Advisory Committee said early this month that the boost in Chinese imports will more than double China's cotton stocks to 5 million tonnes in 2011/12, and shipments from India, Brazil and Australia could reach record levels.

China imported about 1 million tonnes of cotton last year to replenish depleted state cotton reserves.

Traders also believe Beijing is unlikely to release cotton from its state reserves, after it stockpiled 3.13 million tonnes from last year's domestic harvest.

"The government cotton prices are very high, given that domestic cotton is weakening and we suspect the government would not sell its reserves now," said the executive.

Some textile mills reached by Reuters said they expect more quotas to be issued and will source cheap cotton from bonded warehouses.

"Imported cotton is much cheaper and we are still interested in buying either Indian or Pakistan cotton from bonded warehouses," said one manager with a textile mill in the northern province of Shandong.

Traders estimated more than 300,000 tonnes of cotton has been stockpiled at bonded warehouses in Shandong, a major cotton consuming area.

China imported 3.36 million tonnes of the fibre last year, of which one third came from India, with the United States being the second biggest provider.

Analysts expect domestic cotton consumption in the year ending August will fall to 7-9 million tonnes, compared with 10 million tonnes in the previous year.

China's textile exports have been hurt by weakening global demand, with exports in the first four months of the year declining 0.3 percent from a year ago.

($1 = 6.3140 yuan) (Additional reporting by Coco Li; Editing by Edwina Gibbs and Richard Pullin)

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