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Nembri speech
EUROPEAN SILK FORUM

Como, October 18, 2005


SITUATION IN CHINA

I am just back from China and anyhow we have been closely following the situation in China as well as in Europe and also in Brazil ever since the beginning of the present tense situation of supply side of the silk market.

The cocoon production of last year 2004 in China have reached 554.000 tons, that is a peak of the quantity for the past five year and was distributed in the different provinces a bit differently than in the previous years. The progressive movement of the cocoon production from traditional regions to relatively new areas has accelerated further while the production in the traditional regions have been decreasing further, being Jangsu northeastern part the remarkable exception.

There are no official data available about the silk yield of the cocoons, and therefore the evaluation of the silk output based on the quantity of cocoons can be completely wrong when disregarding the influence of the silk content in the cocoons. Our impression is that China has not realized in time that one kilo of cocoon produced in the Guangxi is not at all equivalent to a kilo cocoon produced in Zhejiang or Shandong, especially when we refer to the quality of past years that was much better than today’s one.

As we directly carry on reeling tests about the cocoons from the different areas we roughly estimate that the overall silk content of the cocoons produced in China has declined about 12% between the production in 2002 and in 2005, and it means that the silk output will decrease in 2005 about 7% comparing previous year, or more. This fact is proved by the fact that several mills have run out of cocoons unexpectedly before the new spring crop of 2005, that was unusual in recent year although quite common in the past.
Our data says that this phenomenon would have happened also in the silk period 2004 if only the same silk year cocoons would have been used, but the cocoon stock carried forward from 2003 crop have been filling the gap, that was not the same case in 2005 obviously.

Consequently it is now said that the cocoons available will be just enough up to Chinese new year time or February in some region and to April at best case in some other regions, leaving an open gap in the supply side for two-three months time.

Reeling mills have now a big concern about how to react to the situation being main worry the possibility of loosing skilled workers when filature forced to close down for a 2-4 months period, specially in Zhejiang Jiangsu and Shandong areas. Therefore some reeling mill already reduced the production in order to dilute the available cocoon and reach without a general stop the new crop in May-June 2006.
Besides, the reeling mills may have now to buy cocoons form the cocoon center at relatively high price, over 70 CY/kg, that is considered risky by them, as they expect that even if they sell now the raw silk output from those cocoons, buyers will cancel the contracts and ask for a price reduction if something negative affects the market, as they know well that their same behaviour will be replicated by customers in future.

As it was said among experts after the relative happiness of farmers for the price of cocoons in 2004, and more now after recent peak of cocoon prices in autumn in Jiangsu specially, China is unable to increase the production for the subsequent year unless enough silkworm eggs have been prepared in the previous season. The eggs production system in China is still mostly based on the annual cycle, that makes impossible to decide for example in October to increase the production for the coming spring over the limit imposed by the available silkworm eggs.

SITUATION IN BRAZIL
Please have a look to the slides about Abrasseda statistics. Forecast for the production for this year is at the lowest level since twenty years and about half what it was in 1994. Adverse climatic conditions have affected the cocoon crop in the past season and already affected the initial crop in September 2005 due to drought and relatively cold climate.
Cocoon price in Brazil reached an extremely high level being unchanged in real comparing previous year but much higher in Dollars due to Real cross rate revaluation.

QUALITY OF CHINESE RAW SILK
It is clear that the price gap between the top qualities and the regular or low qualities was rapidly adjusted in the past months. The new consciousness of the higher cost and also of the interest of some portion of the market for the truly high qualities have pushed up the gap. What was a mere 1-2 Usd difference between an ordinary 3-4A from C area and a true 6A from an A area and selected mill become, after some fluctuation along the beginning of this year, a real strong gap rounding the 5 or 6 Usd per kg, reflecting in fact costs, skill, and origin of cocoons more correctly.
Whether there will be sufficient good quality raw silk in coming months is a serious wonder after the poor results of the autumn crop in A areas and in some portion, the good one actually, of B areas.

MARKET MOOD AND EXPECTATIONS
At the beginning of what we could now call a serious crisis on the supply side of raw silk, a number of operators have thought to speculation and temporary price hike, however while the time was passing the mood have changed progressively to a moderately positive outlook, and after sometime the forward positions at Jiaxing bourse have overcame the price for the spot transactions, showing clearly a complete change of mood in China. Please check the variation in the slide.
Still, some parties are saying that about 800 tons of raw silk have been disposed to the electronic market to avoid the rapid increase of price of futures prior to cocoon collection in order to avoid a too high cocoon price and to protect the all industrial chain.

Deliveries have been delayed, contracts cancelled, advance payments required and the unfulfillment become the rule. The price for last good quality cocoon purchase in Jangsu have reached the historical top at almost 1500 CY/Dan.
A few factors different than structural unbalance between supply and demand have been playing an important role creating today’s situation. After many years of uncertainty and bad business and price fluctuations downward most operators did not keep the relatively large stocks they used to have before, and this attitude has been taken worldwide, in Europe as well as in Japan and in India. When prices started to go up and it become clear that some shortage was coming, almost all buyers tried to buy beside their usual consumption some more quantity to refill the stocks, as they were caught out of balance and the price increase have self-fuelled the further price hike.
A few other situations have to be considered.
In India, the price over 22 Usd have overcome the level of the antidumping therefore the importers have now easier chance for import and no risk to have the containers standing by at the customs waiting for retesting or import authorization. The new rules will be actuated concretely by Indian Government after their national holiday in these days.
Chinese domestic weaver of white fabrics and some blend in China since June had filled their orders capacity until September and therefore actively bought domestically, being much more attractive customers for silk reelers than export market, still in need of actual good qualities and CIQ, and often willing to select cargo before the final purchase.

Although the cost of raw silk in China is easy to calculate knowing the price of cocoons and the reeling cost in different areas, the price will be at least until coming crop in 2006 decided by demand and supply and not anymore cost based as it has been for a few years in the recent past.
It seems that we have to expect a situation of “first come first served” from reeling mills and a kind of “permanent competitive tender” for the few available good qualities where the quickest one in accepting the higher price will get the cargo.

For ordinary qualities everything will be decided by Indian demand and by Chinese domestic demand. However, considering the big failure in the 10th Indian plan for sericulture development that is far from reaching the target, we may expect a brisk demand on all qualities of raw silk without exception. Please compare the slide showing the targets 2002-2007 with the actual production that is substantially unchanged and limited to 14-15.000 tons.

Thank you very much for your attention.

Andrea Nembri