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COLUMN-Cotton and rubber hostage to China inventories: Clyde Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

LAUNCESTON, Australia, April 2 (Reuters) - Cotton and natural rubber appear to have little in common, other than being agricultural commodities, but both are currently hostage to developments in China.

Both commodities have struggled this year in Asia as the market frets over the high stockpiles of cotton and rubber in China, and questions the strength of the world's second-largest economy.

Benchmark rubber futures in Tokyo closed on Tuesday at 234.3 yen ($2.26) a kilogram, down almost 15 percent since the start of the year.

Cotton futures on China's Zhengzhou Commodity Exchange ended Tuesday's session at 18,245 yuan ($2,939) a tonne, down 9 percent from the peak so far this year of 20,060 yuan on Feb. 24.

The weakness in China-traded cotton futures hasn't yet been matched by the global benchmark ICE contract, which ended on Tuesday at 92.07 U.S. cents a pound, up 8.7 percent since the start of the year.

However, the U.S. cotton futures are down 2.2 percent since the closing high of 94.11 cents a pound on March 25.

Part of the reason global cotton prices are starting to struggle is that the outlook for imports by China is dimming as authorities ramp up sales from domestic stockpiles.

China's imports of cotton slumped 35.5 percent in the first two months of 2014 compared with the same period last year, dropping to 538,542 tonnes. Arrivals from number two supplier, the United States, were particularly hard hit, plunging by 47 percent.

China, the world's top consumer of cotton, will offer 200,000 tonnes a week of higher-quality, imported fibre from state stockpiles as part of moves to cut the state reserves.

China is shifting from a buying scheme to a subsidy support system as part of efforts to cut a stockpile that the International Cotton Advisory Committee estimated at 12.8 million tonnes, more than half of the global total of 20.04 million tonnes.

With China offering some of its stockpiles of imported fibre for sale, which is preferred by spinners as it's of a higher quality than domestic cotton, the chances are China's imports will continue to slump.

While imports may not drop to zero as the stockpile sale price is still likely to be higher than the cost of buying from overseas, the huge quantities being offered will serve to put downward pressure on global prices.

CHINA RUBBER INVENTORIES

Similar to cotton, the market for natural rubber is concerned about high levels of Chinese inventories.

Chinese natural rubber imports have grown sharply in the first two months of 2014, rising almost 35 percent from the same period last year to 534,065 tonnes.

However, this is most likely a result of buyers taking advantage of lower prices, as it seems that the bulk of additional imports have served only to boost stockpiles.

Inventories at the port of Qingdao are currently around 340,000 tonnes, up from around 290,000 tonnes in January, according to traders.

Warehouses monitored by the Shanghai Futures Exchange saw inventories drop to 181,134 tonnes on the week to March 28, but this is still close to the 2014 peak of 207,658 tonnes for the period ending Feb. 7.

Inventories have been trending higher since May 2011, when they stood at just 10,291 tonnes.

Additionally, there are reports of Chinese rubber importers defaulting on cargoes as prices for tyre-grade rubber dropped to multi-year lows, although quantities have yet to be established.

The drop in rubber prices has prompted the top three producers, Indonesia, Thailand and Malaysia, to consider action to limit supplies in a bid to drive up prices.

The three, which account for 70 percent of global natural rubber output, last tried this in the 2012-13 season, but were only successful in lifting prices for a short period.

It's unlikely that they could drive prices higher in a sustained manner, unless they are prepared to deal with the political consequences of limiting the incomes of farmers or spending heavily to build up stockpiles in their own countries.

The best hope of a revival for rubber comes from the demand side, with Chinese vehicle sales remaining robust, rising 17.8 percent in February from the same month a year earlier, to be 10.7 percent higher on a year-to-date basis.

Stronger economic growth in the United States and Europe may also boost car sales, and hence sales of tyres, the main use for rubber.

However, with inventories at high levels, the outlook for rubber prices over the next few months is bearish, and it will take signs of faster economic growth in China and the rest of the world to spark a revival.

(Editing by Richard Pullin)