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UPDATE 1-China tells cotton mills to stop buying Australian supplies -sources

(Adds traders’ comments, details; paragraphs 10-13)

SYDNEY/BEIJING, Oct 16 (Reuters) - China has ordered cotton mills to stop buying Australian supplies, an Australian government source and two China-based cotton traders briefed on the matter said on Friday, the latest sign of worsening trade ties.

Relations soured after Canberra accused China of meddling in domestic affairs, and worsened when Prime Minister Scott Morrison sought an independent inquiry over the origins of the coronavirus that emerged last year in the Chinese city of Wuhan.

China is the biggest buyer of Australian cotton, considered the highest quality of all import origins, and the trade was worth about A$900 million ($637 million) during the 2018/19 crop year.

The suspension of cotton purchases comes just days after Canberra scrambled to confirm reports of another suspension ordered by China, of coal buys from Australia.

“The millers essentially get a quota they can import, and essentially they’re being told they might not get their quota next year if they buy our cotton,” an Australian government source, briefed by Australian officials in China, told Reuters.

If Chinese millers continue to buy from Australia they could be hit with a tariff of 40%, added the source, who sought anonymity as he was not authorised to speak on the matter.

In an email, Australian Trade Minister Simon Birmingham said the government was “aware of changes in exports conditions” for cotton, and warned China against steps to choke trade.

“Impeding the ability of producers to compete on a level-playing field could constitute a potential breach of China’s international undertakings, which would be taken very seriously by Australia,” he said.

China’s embassy in Australia did not immediately respond to requests for comment.

Two China-based cotton traders said many mills had received verbal instructions early this week or the last. The move will hit supply of top cotton grades.

“It’s very supportive to the price of high-grade cotton,” said one trader, adding that this year’s domestic crop included a smaller proportion of high-grade fibre.

China imported about 400,000 tonnes of Australian cotton in 2019, customs data shows.

Some Chinese firms may still use Australian cotton in their mills in Vietnam, added the second trader, while top grades from Brazil and West Africa could be used more in China.

In May, China imposed anti-dumping and anti-subsidy duties totalling 80.5% on Australian barley, effectively stopping a billion-dollar trade in its tracks. On Tuesday, China said it had also begun an anti-dumping investigation into Australian wine imports. ($1=1.4120 Australian dollars) (Reporting by Colin Packham and Dominique Patton; Editing by Clarence Fernandez)

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