Expand Our Market with Quality Cotton/Yarn Briefing for CCI Delegation

1. Expand Our Market with Quality Cotton/YarnBriefing for CCI Delegation October 9th 2016, Shanghai

2. Outline • China’s Economic Review • China’s Cotton and Textile Industry • CCI Program in China • Appendix: The Status of MMF in China

3. China’s Economic Review: The Good News and The Bad News

4. The Good News

5. (1) New Industries Are Emerging In China Internet Plus and E-Commerce High-Tech Industries Are Growing Rapidly New Industries Advanced Equipment Manufacturing Industry Alternative/New Energy

6. (2) Traditional Industries Are Upgrading • Manufacturing industries • Strive to upgrade through innovation and optimizing resource allocation • However, traditional industries are lagging behind and shrinking • High-pollution, high-energy consumption • Financial debt, high costs, overcapacity, and warehouses

7. (3) Market Forces Start To Play A Dominant Role Simplified administrative procedures Delegating power to local levels Promotingprivate Industries Reform of State-Owned Enterprises High growth in the service sector • Economic growth is gradually shifting from government-driven to market-driven.

8. The Bad News

9. (1) The Chinese Economy Is Facing A Downturn • According to Conference Board, China’s GDP has increased by only 4%. The economic downturn is the result of several factors. • Bird’s Eye View • From 2008 to 2014, Total Factor Productivity (TFP) has decreased. It is equivalent to only 1/8th of the US and Europe’s TFP. • View From The Trenches • Traditional manufacturing industries are lagging behind • Weak market • Decreasing profits • Costs are going up • Difficult for private enterprises to get funded; financing towards SOEs but not POEs • Unfavorable public opinions for MNCs and POEs, therefore their confidence in the economy and the government is deteriorating.

10. (2) The “Master” vs. The “Market” • Reform Is Stalled • The economy relies on a stimulus plan and credit. The risks are high. China’s economy is using a macro-level government plan to replace the market forces. Macro Plan SOEs advances at the expense of the POEs POEs SOEs • One Belt One Road, • Beijing-Tianjin-Hebei • Yangtze River • Economic Belt

11. (3) Reform vs. Re-Form • The 4 Challenges of the Economy: • Debt • Overcapacity • An aging population • Environmental pollution Re-form Reform vs More Market-Driven More Stalinist, Strong Party and SOE, Smaller POE

12. Our Understanding of China’s Cotton and Textile Industry

13. Facts Finding Trips in June and August, 2016 • NCC Leadership Delegation Trip • Time: 28th June-2ndJuly, 2016 • Place: Wuhan, Xiantao and Xiaogan, • Hubei Province Urumqi • 2016 Facts Finding Trip • Time: August 3rd – 8th, 2016 • Place: Urumqi and Korla, • Xinjiang Autonomous Region Wuhan

14. Key Findings – 1. A Tough Cotton Market Weak Market • With the slow down of China’s economy and weak demand of the international market, the demand for cotton is weak Strong Demand Risk of China’s “Target Price Policy” • The low quality of cotton does not meet the demands of upgrading the textile industry • The textile industryis crying out for high quality cotton • The Chinese government looks for subsidiary policies to protect the interests of farmers, while protecting the jobs in the textile industry. And these policies may be very risky because of unstable financial policies. China’s Cotton Industry Insufficient Supply • The difficulty of increasing the farmers’ income and high cost of production led to a shrinking in the cotton plantation and decreased its overall production. • Short supply of imported cotton due to the TRQ limitation and no STRQ issued in 2016 Environmental Constraints • Natural resources are limited, and the environment is very sensitive, especially in Xinjiang.

15. 2. Dynamic Textile Industry Go West Go Out • According to CNTAC, by the end of 2014, there were 2,600 Chinese textile industries that had setup the outbound textile plants, trade or design centers. • The One Belt and One Road Initiative will further promote this momentum. • Guidance on supporting the development of the Xinjiang textile and garment industry issued by the State Council in June 2015. • The Chinese government plans to invest RMB 20 billion to establish a 20-million spindle textile capacity in ten yearsin Xinjiang. • China’s 13th Five Year Plan aims to strongly promote industry upgrading and quality improvement

16. China’s Cotton Reserve Will Become History No Fresh Cotton into the Reserve Extension of the Auction The period extended to the September 30thand up to an additional 0.63 MMT of reserved cotton will be offered to the auction. So the total amount of reserved cotton provided during the auction will be 2.63 MMT in 2016. New Cotton in October: The price for new cotton may decrease to RMB 14,500 The Tightening Central Budget Xinjiang Target Price in March, 2017: It mayget lower, which may decrease the motivation to grow cotton. Textile Industry Seeks High Quality Cotton 2017 National Reserve Auction in April- May Note: If the national reserve continuously releases 3 MMT in 2017, when considering the strategic reserved cotton in China is estimated to be at 3 MMT, then, after 2018, China’s cotton reserves will become history.

17. 2017 and Beyond • Gap • China will again face 2 challenges that have spanned for decades: • 1) Quantity of the cotton supply is not enough • 2) Quality of the cotton supply is not good enough • Solution: International high quality cotton and yarn

18. CCI Program in China Four Pillars of Collaboration to Promote US Cotton/Yarn Promotion Program Government Relations Licensee Relations Reputation Building Cotton USA Media Relations

19. CCI’s Engagement Programs in 2016 • March • Mr. Gary Adams and Mr. Sledge Taylor’s visited the CNTAC • Policy Forum with CCA in Beijing • May • Mr. Bruce Atherley’s participation in CCA Cotton Industry Summit in Wuhan • June • NCC Leadership Delegation headed by Mr. Shane Stephens • Signing the LOI between NCC and CCTA • August • CCI 2016 Facts Finding Trip to Xinjiang • September • CCI was invited to attend the CNTAC forums in Xinjiang • October • CCI Quality Conference in Shanghai, CNTAC leaders participated • November • CCI Sourcing Summit

20. Keeping Momentum For New Wins in China We are a high quality and stable cotton / yarn supplier committed to China.

21. The U.S. Remains the Largest Supplier in 2016 From January to August, 2016, Chinese cotton imports totaled 2,729,493 bales (594,277 MT), a decline of 46.44 percent y/y. U.S. cotton was ranked as the largest with a total quantity of 763,640 bales (166,263 MT), accounting for 27.98 percent of total imports. Australia was ranked as the second supplier with a total quantity of 676,034 bales (147,189 MT).

22. Thank You

23. Appendix: The Status of Man-Made Fiber (MMF) In China October 9th 2016, Shanghai

24. China Steadily Becomes the Biggest Chemical Fiber Producer • In 2015, the total worldwide annual fiber production was 90.59 million tons, and chemical fiber accounted for 73.4% (66.47 million tons). Source: Japan Chemical Fiber Association, 2015. • For the past 7 years, the worldwide amount of chemical fiber production has been increasing. In 2015, China’s chemical fiber was 50.38 million tons, with a 7.35% year-on-year increase. China’s production accounted for 75.79% of the global chemical fiber production. Note: In definition, chemical fiber includes the synthetic fiber (SF) and man-made fiber (MMF). Since both SF and MMF are the main supporting raw materials to the textile industry, in this research, MMF refers to chemical fiber in general.

25. The Rapid Growthof the MMF Industry in China MMF Production

26. MMF in the Textile Industry • In the past 10 years, the MMF industry has seen rapid and robust development. Due to the limited growth of natural fiber (i.e. cotton), MMF has now become the largest contributing factor to the development of the textile industry. According to the “12th Five Year Plan of the Textile Industry Development,” by the end of 2015, the total MMF processing volume should reach 39 million tons and account for 76% of total textile fiber processing. • According to the CNTAC, the ratio of the MMF processing amount vs. total fiber processing has increased from 63.4% in 2005, to 70% in 2010 and has already reached 82.2% in 2015. Namely, the cotton blending ratio was decreasing from 36.6% in 2005, to 30% in 2010 and to 17.8% in 2015.

27. The Growth of MMF Greatly Contributed to the Textile Industry MMF Production Domestic Cotton Production Source: CNTAC, The National Bureau of Statistics and MOFCOM • With the stable and decreasing supply of cotton, the growth of the MMF industry has greatly contributed to the growth of total fiber processing volume, which is a key indicator for textile industry development.

28. Price Comparison Between Cotton vs. MMF

29. Brief Analysis Behind the Phenomenon

30. Overcapacity of the MMF Industry • However, the MMF industry has suffered overcapacity issues due to rapid expansion in the past ten years. • 2 Case Studies of Overcapacity in the MMF Industry: • 16 new polyester enterprises with 525,000 tons capacity shut down or went bankrupt in the last 2 year, and the trend is continuing. Actually, the operational rate of the capacity has been less than 60% in the whole new polyester industry. • Shaoxing East Petrochemical Bankruptcy in 2015. As the leading enterprise in the PTA sector, the bankruptcy indicated that the polyester industry has fastened the destocking process. By estimation, at present, the excess capacity of the PTA industry has reached 15 million tons.

31. Key Words of the MMF Industry in the 13th FYP In September 2016, the CNTAC released the 13th Five Year Plan for the Chinese textile Industry. According to the Plan, several key words can be observed: • Capacity: • The fiber processing rates among apparel, home textile and industrial textile during the 12th FYP was 46.8:28.6:24.6. During the 13th FYP, the growth of industrial textile will be the main driving force for MMF growth, and the rate will increase to 33%. • Continue the de-stocking process: encouraging the enterprises’ mergers and acquisitions, as well as the orderly exit of the market • Growth Rate: • During the 13th FYP period, the average growth rate for the MMF industry is set at 3.6% down from 9.2% during the 12th FYP. And the production is projected to reach 55 million tons. • However, it should be noted that this 3.6% is based on China’s current great quantity which is already the ¾ global production. • Development Outlook: • The growth pattern towards to the model of intellectual, green, and high performance. • The potential of industrial textile will be further released due to the development of industries of logistics, new energy, infrastructure, etc.

32. Competition Exists Together With Cooperation • It is the common fact that the development of the textile industry rests upon the resultant of two resources: Cotton and MMF. • The upgrading of the Chinese textile industry is the irreversible trend in the 13th FYP period, which will call for high quality cotton and high-performance MMF to meet the demand. This will further call for the cooperation instead of competition between cotton and MMF to jointly promote transforming the textile industry from low-end to high-end. • Therefore, high quality is the only way for cotton to stay in the market and stay alive. High quality cotton is always winning the place in the market.