USDA: Multiple factors will drive cotton consumption recovery next year
2024-04-30 15:25
According to the May report of the United States Department of Agriculture, global cotton consumption in 2024/25 is expected to be 116.9 million bales, an increase of 3.5 million bales year-on-year, the highest level in four years.
After reaching 124.3 million bales in 2020/21, global cotton consumption has stagnated in the past two years, averaging 112.5 million bales. In the future, the increase in cotton supply and the decline in global cotton textile inventories are expected to promote cotton consumption. Global cotton consumption is expected to grow by 3% in 2024/25, nearly double the historical long-term average of 1.6%. Nonetheless, the overall level of cotton consumption remains below the long-term trend as competition from chemical fibers continues to depress cotton consumption.
The most important factor in the growth of cotton consumption in 2024/25 is that the replenishment of the cotton textile industry chain will expand. Judging from the recent global cotton consumption and cotton product imports, the current global textile inventory has been significantly lower than the level of the past two years. Clothing retailers will see a sharp decline in import demand in 2023 and the first quarter of 2024 due to excess inventory accumulated during the pandemic, rising inflation and financing costs, and the economic downturn in the European Union (the second largest import market). In February 2024, total imports by major importing countries for the 12 consecutive months were just under 7 million tons, compared with more than 8 million tons in the previous 12 months. The latest annual imports (trailing 12 months) are below the 10-year average, so imports from major import markets are expected to trend upward this year to replenish inventories.
The United States is the world's largest importer of cotton products. Consumer disposable income is strong, unemployment is low, and wage growth is high, which will keep clothing purchases strong. In 2022-2023 and the first quarter of 2024, U.S. GDP growth exceeded ex2024, U.S. GDP growth exceeded expectations, and consumer demand is resilient. Inventories at U.S. wholesalers and retailers continued to decline, driven by active purchasing. The United States accounts for a very large proportion of global clothing imports, maintaining a level of 3 million tons in recent years, higher than the EU's 2.5 million tons and other markets' 1.5 million tons. The resilience of the U.S. economy is expected to support growth in retail orders and cotton demand due to the U.S.'s large influence on end product demand.
Cotton consumption growth will also be supported by global economic growth. There is a high correlation between cotton consumption and changes in global GDP. However, cotton consumption and GDP will not always stay in sync. Compared with the last century, current cotton demand is more elastic because substitutes account for a significantly higher proportion of global fiber consumption. The International Monetary Fund's April 2024 World Economic Outlook predicts that global GDP will grow by 3.2% in both 2024 and 2025, with the European Union and other developed countries accounting for the majority of the growth, while growth in the United States and China is expected to slow down.
At the same time, the increase in global cotton supply will also promote cotton consumption. In 2024/25, the combined initial stocks and production of cotton will be nearly 200 million bales, an increase of more than 5 million bales year-on-year, which is the highest level in the past four years. Increased cotton supply, spin mill operating rates, and more stable financing and energy costs will also provide support for cotton consumption. Since the beginning of 2022, cotton consumption has been suppressed by a strong rebound in energy markets and rising U.S. interest rates. The lagging effects of sharp price swings, including cotton prices, rising interest rates and a stronger U.S. dollar, continue to put pressure on cotton consumption in major consumer markets. However, the World Economic Outlook rHowever, the World Economic Outlook recently released by the International Monetary Fund shows that fuel prices and interest rates in major economies are expected to decline in 2024-2025 compared with 2022-2023.
In the past two years, high textile inventories and production-end inflation have led to long-term suppression of flower yarn price differences, and a significant decline in yarn mill profits. The chart below shows that since this year, the changes in floral yarn spreads and overall profits of yarn mills are relatively close to changes in global cotton consumption. Margins are expected to rise with rising mill orders and lower cost inflation.
The uncertainty about the outlook for cotton consumption lies in the unpredictable and lagging impact of global cotton production levels in 2024/25 and high global interest rates. Other uncertainties include: the current conflicts between Russia and Ukraine and the Middle East may cause risks, and the potential low growth caused by high U.S. interest rates also makes the outlook for cotton consumption cautiously optimistic. Finally, shrinking economic activity in the EU and UK also creates uncertainty about the outlook for textile procurement.
