Challenges and Opportunities in New Environment

1. Challenges and Opportunities in New Environment Feng Mengxiao, CNCIC

2. Content Textile performance Challenges and Opportunities in New Environment

3. Textile Performance

4. Key fiscal indicators of cotton spinning for 2013

5. Profit growth of scaled cotton spinning enterprises

6. 近年来棉纱进口量快速扩大

7. Greater elasticity in cotton consumption • R&D of non-cotton fiberadvances，MMF raw material still has downside potential • Competition between low-count yarn and domestic cotton will continue • Greater elasticity in cotton consumption • China’s textile performance now less correlates with cotton consumption and appear unlikely to return

8. Challenges and Opportunities in New Environment

9. ICAC forecast（March, 2014） 单位：万吨 数据来源：国际棉花咨询委员会（ICAC）。

10. Commercial stock decreases further • NCMMS survey shows that by March 7,seed cotton delivery progress reached 97.5%, unchanged from a year earlier. Cotton ginning progress reached 99%, down 0.2 point. Sales progress reached 95.5%, up 0.6 point. Xinjiang cotton harvest, delivery, ginning have completed. Sales was 4.3 points behind a year ago at 99.1%. Cotton stock in marketing channel is about 121000 tons less than a year ago. • Reserve purchase dropped sharply in February to total 327000 tons, a decrease of 438000 tons from January. By the end of March, 2013/14 reserve purchase totaled 6.3 mil tons.

11. Cautious approach and a slower business Average industrial cotton stock is equivalent to 36.6 days, including port arrivals, down 0.4 day from previous month, 4.2 days less than a year ago, also 4.6 days less than recent 3-yr average Yarn reported a production-to-sale ratio of 94.2%，down 0.4 point from prevous month, up 1.1 point from a year ago. Yarn stock is equivalent to 26.4days of sale, up 1.3 days from previous month and 3.2 days more than a year ago Fabric reported a production-to-sale ratio of 93%, up 0.2point and 4.4points；库存. Fabric stock is equivalent to 48.9 days of sale, down 2.9days and 9.1 days 64% intend to purchase, down 5 points from Feb and down 8 points from a year ago. 36% are undecided, up 5 points and 18 points. No one refuse to buy cotton Daily reserve sale averaged 11000 tons, down from 23000 tons recorded last season. By March 7, reserve selling totaled 646000 tons, 578000 tons of domestic reserve and 68000 tons of imported reserve

12. Market awaits two major policies • Given a tight cotton supply, a lower auction price and a combined quota against reserve sold, cotton price tend to move lower • If quota supply is abundant, domestic cotton price should work lower to find a new balance • ICE and import price tend to be volatile before new policy is announced. The cotton industry is moving into a period of caution and purchase of cotton, cotton yarn, cotton fabrictend to slow down further and cotton’s share in these products tend to drop • The 2014 target price is expected to bring down inventory levels again in the supply chain • Cotton subsidy to have an opposite effect on cotton price, compared with reserve procurement

13. Domestic and world price

14. Favorable economic environmentwith a policy shift • IMF forecast in January that world GDP is to grow 3.7％ in 2014，the first upward revision in two years. World bank also noted that world economy has been driven by new economies in the past five years and now the developed nations are providing another engine • The trans-global game playing enters into a new stage as many countries face a changing economic policy, particularly monetary policy. Some new economies experienced some political unrest. The dynamics on financial market is unlikely to fade out • Chinese economy will have more vigor and economic performance is expected to see further improvement • The government work report projects 2014 GDP growth at 7.5% • 2014is a year of reform that focuses on structural change, enhanced reform, stabilizing growth and risk management. The biggest anticipation comes from reform, e.g. reduced local debt, tax cut, lower financing cost, improved enterprises' profit level and further boost in consumer’s spending

15. Cotton industry to see another consolidation with the new policy • Cotton area in inland provinces will decrease sharply in the coming years and the free market for cotton trade will see a major expansion as the resource allocation will be largely driven by market • Xinjiang cotton planting will become a hot investment and Xinjiang cotton growing will have a guaranteed return protected by the government, which brings a competitive edge • The accumulation of key factors in China cotton market will accelerate and the industry chain will see rapid consolidation and a deepening growth • Target: to minimize the production cost so as to achieve maximized profit • Horizontal: scaled cotton planting, cotton grower’s shift to farm holders, the capacity of cotton procurement and processing will see a major consolidation, cotton traders to begin various cooperation, including procurement and merger • Vertical: Cotton grower, procurement sector and even merchants and textile firms will all consolidate

16. Summary Economic recovery in developed nations to be steady, new economies to see political and market unrest. China’s economy to be stable with a new reform policy World stock-to-use ratio (ex-China)is 1 percentage point lower than 2013, which is at the neighborhood of normal years. Regardless of the abnormal years of 2010、2011and 2012, International Cotton Index (M) averaged 81.9 cent/lb (11000 yuan/ton) in the past ten years Xinjiang cotton production is forecast at 4.5 mil tons, about half of the domestic cotton use. Next season, some domestic mills are expected to regain some competitiveness with a better quality domestic supply. Some of them may recover and expand business. Domestic cotton consumption is likely to grow and cotton import may increase The price gap will narrow. Some low-count yarn production are shifting back to China from southeastern Asian countries. World cotton price to trend lower next season. Cotton, cotton yarn and cotton fabric will all experience another consolidation The coming years will still be import opportunities for China cotton industry. After sharing the global benefit for more than a decade, Chinese cotton enterprises should quicken their step to globalization and allocate resources worldwide. As the new round of Chinese reform begins, the next ten years will be a great time of concentrated birth of Chinese international giants. We will discuss in more detail in CNCotton daily, weekly, monthly and special reports

17. Thank you! All data in this report come fromCNCotton Tel：010-58931122