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International Cotton Association witnesses surge in disputes
15
Jul '11
International Cotton Association (ICA), the world's leading arbitral authority, has already opened 83 cases relating to international disputes this year, compared to an average of 45 disputes it handles in an average year.

The unusual surge in disputes between cotton suppliers, textile mills and traders has occurred due to some parties declining to execute the sale contracts after the price of cotton saw a historic rise and trebled to over US$ 2 a pound in March 2011, and then reduced to half.

The price soared during the initial months of the current year as mills vied to secure the scarce cotton in the midst of low stocks worldwide and restrictions imposed on cotton exports by India, the second-largest exporter.

The high price, in turn, prompted textile firms to increase the polyester content in fabrics, thus softening demand for cotton. Orders for 132,500 bales from the US, the leading global exporter of cotton, were cancelled by importers.

The quick rise and fall in price provided an environment for mills that had signed contracts to buy expensive cotton, to refuse to take delivery. Earlier, when the price was rising, suppliers who had agreed to sale at lower prices went back and asked for renegotiation of contracts.

Experts estimate that due to high price volatility, contracts seeing some form of default this year will be as high as 10 percent, as against a mere 2 percent in a normal year.

The high volatility in price is explained by experts thus: “When the price was soaring, producers refused to sell in the hope fetching even more price. This forced the textile mills to anticipate that the price would rise even further and they thought of buying more cotton at the existing price, rather than buying later at an increased price. In effect, the demand kept on increasing as the price went up. And, it is just the opposite now, when the price is decreasing, i.e. the supply has increased enormously as the mills owners refuse to procure, anticipating a further fall in price.”

Both traders and textile mills are the subject of arbitration claims this year as there are enough reasons, including export bans, for not fulfilling a contract.

While Bangladesh and Indonesia are the most affected countries, some countries appear in the ICA's default list for the first time this year. These include countries like Greece, Tanzania, Pakistan and China.

Fibre2fashion News Desk - India

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