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Silk Market Situation and Raw Silk Production in China (Andres Nembri)
Author:  admin     PublishDate:  2008-07-09      Hit:  8109
Andrea Nembri speech

May 15, 2008
(Andrea Nembri, Nembri Industrie Tessili SpA)
At this time of the year we are just on the hedge of knowing for sure about a large portion of the cocoon crop in China, while on the other hand the facts able to determine the results specially in terms of quality, like climatic factors, are still unsure and we will have to watch week by week the facts in China until mid of June.
Last year an overall cocoon production announced higher than previous year to a record high level proved to be short at least in traditional northern regions - and partially also in the south like in Guangdong province - to come smoothly to the new crop and a relative cocoon shortage started soon after the Chinese new year holidays. Market took some time to react in terms of price and eventually registered a price hike of sizeable amount.

The price gap between the lowest end of the quality and the highest end touched as a peak an extraordinary and unpredicted level of 6-7 Usd partially pushed by the buyers in need of high quality silk combined with the weak demand from countries using ordinary
qualities. A few times in the past year such situation happened although with a less relevant gap showing a kind of new consciousness of the market that the high quality has to be paid a fair price: in a situation where some users are pressing the Chinese side so strongly for the quality improvement a difference among good quality silk and low qualities silk of a mere 1-3 Usd is illogical and unfair and cannot bring to the desired results: the right quality for the most demanding use of raw silk.
In the northern and traditional regions the distribution of silkworm eggs resulted a bit lower than last year with an official 10 % reduction – a reduction a bit bigger than this in our estimation - while on the other hand the winter frost has forced to a better pruning of mulberries resulting now in a higher quality of mulberry leaves as we have not seen in the past years. However in Zhejiang Jiangsu and Shandong, China is facing a relevant problem of pollution: it is not commonly known that silkworms can develop a kind of subchronic intoxication that is not such as to kill them at once but reduce their appetite and their resistance to disease, typically to poliedrosis, in the latter part of their life cycle and it
ends up in a poor quality of cocoons and less production. We consider that in the areas most polluted such syndrome is likely to happen (better said: to happen again) and therefore to originated a crop less good in quality than somebody’s expectations: how
much this will affect the overall output is very difficult to estimate at this stage.
The autumn crop is said by pessimistic people to have already virtually disappeared, based on some correct consideration of the season for the rice crop and the immense quantity of agrotoxic used for the rice culture. Although the description of the fact is
correct, we do not estimate such a strong effect and we think that the situation expressed for the spring crop has to be repeated for the autumn crop without more drama.
Nobody is willing to declare the price for the cocoons in the north that seems to be left for a late decision: on the other hand it is clear that the cocoons price pushed up by other
products competition will not be lower than 1500 Yuan and may reach a quite higher level
if the pressure on the prices continues. This is somehow a two times highest price in China
for over a decade: it is the highest price in Chinese Yuan and highest in Usd due to the
continuous revaluation of the CY against the Usd.
Sichuan has recovered importance in the production of cocoons and making some effort to
improve the quality too, but so far success is very limited. Yunnan has extremely good
conditions under some point of view however seems very slow in development. In fact this
area favored by climate specifically is developing a number of other profitable agribusiness
and has a relatively lower interest in sericulture.
Guangxi has started since few weeks the crop and rumors have been spread out about a
dramatic reduction of the cocoon output. However such rumors clearly exaggerated the
problem that has affected in a statistically high percentage (40 to 50%) the crop when
measured on a year to year basis while in fact not affected at all the forecast for the all
year being initial crops naturally very scarce in quantity. The prices presently paid ranging
1000-1100 CY per dan are high prices and encouraging enough for the social conditions of
Guangxi although we have to be aware that the cost of sericulture in China is high and the net revenue left in the hands of farmers if every cost is deducted and not subsidized by local government is quite poor.
About the quality of the cocoons in the south there is an obvious effort to improve it and some relevant results are being achieved in some counties. The general feeling and sentiment of all operators is that it is necessary to rely on Guangxi as the main source of
cocoons and raw silk for the near future and therefore some important effort has to be made to satisfy also the demand of high quality raw silk. In my view, as there are few operators passionate about sericulture in China that is rather seen only as a business,
without a reasonable gap of prices between high and low qualities such improvement will fail to happen originating a dramatic scarcity of the high quality so necessary in Europe.
This subject is leading to an analysis of the silk reeling situation. There is still an important flow of cocoons from southern regions to the north, where the cocoons are preferably taken by truck due to unreliable rail transportation when the condition of the cargo are
concerned. This originated an extra cost very relevant and cannot be continued for long, although on the other hand allows some buyers to select their cocoons better.

The cost of reeling has dramatically increased in China pushed by the rise of salaries in connection with a wild inflation specially hitting the food sector, and the coal cost. However coal is a product of China and widely used and its price internally has not made the steam costs as high as it would have been if based on oil price. Main struggle of reelers was originated by a tightening by government about workers salary, contracting conditions and a fair treatment that piled up with a wild turnover of workers taken to traditional reeling regions from faraway provinces. The yield and reelability of cocoons become less and added costs to costs. The joint effect of all this factors have made Zhejiang, Jiangsu and Shandong reeling mills hard to treat comparing past and very firm in the negotiation of

The price situation sees a general increase either in Yuan either in Usd with a steady tendency supported by expectation of a further revaluation of CY at a rate not inferior than 1% per month. However a price forecast at this stage is extremely difficult, because we
can say that based on past and perspective cost of cocoon and reeling cost the present price level is enough, maybe just enough, to cover the cost of reelers, and therefore a further price hike shall be supported by some serious problem in cocoon crop or by a greater unbalance about demand and supply.

It is also a fact that reelers are unwilling to take in volumes of cocoons at a price that they consider too high comparing expectations of prices and some reeling mills are reported having being temporary closed to bypass the immediate need of cocoons and to benefit
from a milder cocoons prices in a later stage of cocoon collection.
The stock piled up by the raw silk price stabilization agency is reported to be still there, and it is said it will be hold until the price in Yuan in the market will give a reasonable margin to the agency against the purchase price, that seems to be a far away timing in the situation.

We come now to a short outlook about demand. Analysis of statistics and market knowledge are showing that the consumption of raw silk for the past year or so has been quite good either in China and in foreign countries. Europe has benefited the most and last year 2007 has been described by several weaver as the best year for a decade at least with the remarkable exception of tie weavers that have been leading the run for years but become relatively weaker in the past year and past few months comparing plain fabric and specially apparel fabric weavers. Japan has suffered ever since the great price hike in
2006 and continuously after the large bankrupt of Takeuchi in September 2006 followed by others. Besides the kimono sector has been hit by severe measures aimed at restricting the credit in the sales of kimono to elderly people specially resulting in a further contraction of the market. Decline of the consumption continued, only partially compensated by the increase of the western style silk garments that are always highly appreciated in Japan that will keep for generations a specific interest for natural silk beauty and products.

India shows in the statistics such a wide fluctuation that proves eventually that the consumption is at least stable – in our evaluation steadily increasing – while the orders
from importers are scattering and strongly influenced by market sentiment, speculation and government regulations. This gives to the market, and to suppliers, a lot of wrong information and bad feeling at a time, when only a short sight is being given.

Thank you very much
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