India’s Ban on Cotton Exports May Unravel Deals After 2011 Disputes Surge

A halt in cotton exports by India, the world’s second-biggest shipper, may boost contract disputes after arbitration cases surged to a record in 2011 following the slump in prices from the all-time high, analysts said.

Yesterday, India effectively revoked export certificates for as much as 2.6 million bales. The nation banned shipments after sales reached 9.4 million bales in the year that began Oct. 1, 12 percent more than an estimated surplus. Cotton surged by the most in nine months on ICE Futures U.S. in New York, and the exchange boosted margins by 76 percent.

In 2011, the U.K.-based International Cotton Association got 242 requests for technical arbitration, more than five times the yearly average and double the record in 2008. From Jan. 1 to mid-February, the group received 41 cases, Nicky Simon, a spokeswoman, said last month in an e-mail.

More defaults probably will involve “Indian merchants to mills outside of India,” Jordan Lea, the chairman of Greenville, South Carolina-based Eastern Trading Co., said in an e-mail. “I understand that most of the Indian cotton that was sold, but yet unshipped, is owed to China.”

Registration Certificates

About 12 million bales had been registered for export, Prem Malik, the deputy chairman of Confederation of the Indian Textile Industry, said yesterday. The government said in a statement that “export against registration certificates already issued” won’t be allowed.

An India bale weighs 170 kilograms (375 pounds). China is the top importer, and the U.S. is the biggest exporter. Jordan of Eastern Trading is the former president of the American Cotton Shippers Association.

India’s farm ministry has asked Prime Minister Manmohan Singh to rescind the export ban announced by the commerce ministry. Sharad Pawar, the farm minister, said today that the curbs will drive domestic prices lower and hurt planting prospects next season.

Cotton futures for May delivery fell 0.5 percent to 91.77 cents a pound at 11:40 a.m. on ICE. Earlier, the price climbed as much as 2.2 percent to 94.24 cents, the highest for a most- active contract since Feb. 17.

Yesterday, the fiber jumped by the exchange limit of 4 cents, or 4.5 percent, to 92.23 cents, the biggest gain since May 31.

Glencore Loss

Before today, the price tumbled 58 percent from a record $2.197 on March 7. Glencore International Plc said yesterday that its agricultural-trading unit had a loss of $8 million in the second half of 2011 following an “unprecedented cotton market,” compared with profit of $659 million a year earlier.

“The cotton industry is at a crossroads,” Antonio Esteve, the president of the International Cotton Association, said in a statement on Jan. 10. “It is easy to succumb to the attraction of short-term gains, but history shows that this will create irreparable damage that will affect the long-term economic sustainability of the cotton-supply chain.”

Most of the 2011 defaults occurred in Bangladesh, Vietnam, Indonesia, Thailand and China, Bill May, the current president of the Memphis, Tennessee-based U.S. cotton shipping group, said in an e-mail on Feb. 14.

India’s move yesterday sent “foreign buyers, particularly Chinese, scrambling,” Andy Ryan, a senior risk manager at INTL FCStone in Nashville, Tennessee, said yesterday in a report.

“At the end of the day, India has exported more cotton already than we thought they might all year,” Lea of Eastern Trading said.

ICE said yesterday in a statement that the minimum cash deposit for speculative cotton-futures trading will increase by $1,430 to $3,300 effective tomorrow for a contract of 50,000 pounds (22,680 kilograms).

“Small traders are going to get out,” Derrick Lewis, a trader at ClearTrade Commodities in Chicago, said in a telephone interview. “With India halting exports, we may have another run-up in the market.”

To contact the reporter on this story: Marvin G. Perez in New York at mperez71@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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