Rising cotton prices threaten Asia textile profits

A doubling of world cotton prices and capacity growth of a third in China over the last two years threaten to strangle margins and profits for textile makers in Asia.

Vulnerable firms include Hong Kong-based Texwinca Holdings and Fountain Set (Holdings) Ltd, which together make about half the world''s knitted cotton fabric, much of it in China, the world''s biggest textile and garment maker.

Victory City International Holdings Ltd and newly listed Weiqiao Textile Co Ltd, China''s largest cotton textile maker, would also be exposed to a prolonged rise in cotton prices, as would south Asian manufacturers such as Arvind Mills in India and Nishat Mills in Pakistan.

Cotton prices have risen 38 percent this year, ING Financial Markets said. Meanwhile, cotton textile capacity in China has grown 30-40 percent over two or three years, Merrill Lynch said.

While some market watchers expect rising cotton prices will ultimately be absorbed by retailers and consumers, Jeanine Angell, a Merrill Lynch analyst in Singapore, said textile makers in China are losing pricing power and will be vulnerable to margin pressure in the coming year.

"It''s quite a difficult proposition to get capacity growth of 20 percent and get price increases as well," she said, adding textile company earnings could fall next year. Angell has a "sell" rating on Texwinca