THE over-stocked global cotton industry is bracing for stiff competition from synthetic fabrics as 15 months of sliding oil prices give polyester a real selling advantage.
But, perversely while oil prices slumped to new lows under $US28 a barrel this week, forward prices for the 2016 Australia cotton crop were around $505 a bale - stronger than last season's typical values in the $480 to $490/bale range.
Australia's reputation for high-quality fibre and the 16 per cent drop in our exchange rate with the US dollar in 12 months have largely insulated grower returns as global prices are eroded by synthetics (derived from crude oil) and mountains of stockpiled cotton overseas, mostly in China.
Global oil values have fallen 70 per cent since September 2014 to their lowest point in 13 years as slowing industrial activity in China coincides with worldwide over production and the return of Iran to global oil markets.
Chinese cotton reserves, currently about 64.5 million bales, are equivalent to almost two years of Chinese domestic consumption.
More than 35m bales are also stockpiled around the world, including at least 300,000 bales of Australian carryover from last year.
China, which lately has consumed about 70pc of Australia's typical 3m-plus bale cotton crop, continues to need premium grade fibre from Australia, but its import orders are slowing as it tries to whittle down domestic reserves.
Australian Cotton Shippers Association chairman, Tony Geitz, said prices paid by Chinese textile plants for purified terephtalic acid (PTA), the chemical synthesis of crude oil used to make polyester, fell 25pc in the past eight months.
Cotton and PTA outright prices generally contributed about 50pc to 60pc to a manufactured garment's final price.
"What tends to happen to raw cotton demand during these changes to competing fibre price spreads is our spinning customers use more man-made fibre in blended yarns," said Mr Geitz, also managing director of merchant firm Reinhart Australia.
"However when those pricing spreads become more normalised the reverse happens and cotton demand will benefit."
The cotton sector's biggest concern was a risk of prolonged cheap oil resulting in the textile industry's cost-saving substitution becoming "the norm, rather than the exception".
Declining cotton usage was an ongoing problem with almost 30pc of cotton's share lost to synthetics since the 1990s as Chinese polyester output grew and consumer trends altered.
"But Australian cotton has a fundamentally great point of differentiation to other growths and competing fibres - we grow some of the brightest, longest and strongest fibre," he said.
Cotton industry analyst Pete Johnson, at Cotton Compass, said oil's latest drop from December's $US40/barrel price resulted in a total 20pc fall in Chinese polyester values in the past year, but cotton futures prices dipped only about 2pc.
Although 100pc cotton yarn prices fell 12pc in 2015, the global premium for Australia fibre had eroded only marginally and returns to growers generally lifted thanks to the sliding dollar.
"Unfortunately with China importing less cotton the challenge is to find alternative markets for our exports, but growers have already sold more than half the 2016 crop and can still lock in 2017 crop for around $515/bale, which is a pretty reasonable result," he said.
Cotton Australia chief executive officer, Adam Kay, said low oil prices had a some market impact, but high cotton prices, such as the near 100pc spike in 2011, hurt market confidence more and damaged long-term grower returns.
"Lower oil prices cause belt-tightening in the industry, but 2016 also looks like being the first time in a few years that demand will exceed new crop supply."
However, ANZ Banking Group agricultural economist Paul Deane is cautious about a demand recovery while so much cotton is stockpiled overseas.
"We've had forecasts of more global demand three times in the past five years and they haven't really eventuated," he said.
"I expect another 10pc to 15pc downward correction in global prices, although there will be good prices for good Australian and US cotton, particularly if our production drops further.
"Also on the plus side, low oil prices mean growers' fuel, fertiliser and chemical costs should fall and freight is more competitive."