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Cotton market evolution in the later period of auction and the impact on cotton textiles
¡ª¡ªXia Shihui, industrial analyst of Huarui Information

2018-05-24 11:46:10
Xia Shihui, industrial analyst of Huarui Information, presented her report of Cotton market evolution in the later period of auction and the impact on cotton textiles 

Mrs. Xia's report is divided into five parts. 

First,China cotton market and state cotton reserves and auction. In the year of 2017/18, commercial inventory was relatively high. By the end of Apr 2018, industrial inventory was 750kt, commercial inventory 3 million tons.In terms of consumption, rectification, reduce or shutdown in printing and dyeing lowered production capability, so yarn and fabric were in overcapacity. Even when end users¡¯ consumption was healthy, it was hard to pass onto yarn and fabric segment.In 2016/17 crop year, the turnover was 3.23 million tons, the remaining amount was 5.26 million tons, and the remaining Xinjiang cotton and upcountry cotton were about 2.89 million tons and 2.37 million tons; By May 11, the cumulative turnover of reserved cotton in 2017/18 crop year was 710kt, and the average turnover rate was 55%.By May 11, turnover of Xinjiang cotton was 412kt, turnover rate 100%. turnover of upcountry cotton was 296kt, turnover rate 34%. 
Turnover rate of upcountry cotton is inversely proportional to the spot-futures basis. 

Second, China cotton market supply-demand and potential uncertainties in the year of 2018/19. China cotton planting area totals 42.18 million mu in 2018, down 4.43% y-o-y. It is respectively 29.1 million mu and 13.07 million mu in Xinjiang and Chinese inland, slightly up 0.47% for the former, but down 13.8% for the latter on yearly basis. 

Effective output (if planting season is good for growing without big volatility of yield): 5.05 (Xinjiang)+0.69 (upcountry)=5.74 million tons (total). 

Import volume=import quota + cotton used by plants in bonded areas. There is positive correlation between import volume and Chinese-international cotton price spread. Quota has positive correlation with import volume but has negative correlation with price spread. Quota is related with policy and cotton in bonded areas is partially marketized. 

On the basis of yearly comparison, Chinese-international cotton price spread has enlarged from Sep, 2017 till now, but Chinese market is weaker than international market in 2017/18 crop year and daily price spread is narrowing. It is still uncertain whether yearly price spread could sustain till end Aug, but the volatility may not be huge. 

To sump up: cotton import volume in 2019 will be similar with that of the recent two years in case of no changes in cotton quota policy. 

Total consumption of 3 major cotton textile raw materials increases year by year, but growing with slower speed as the growth in 2017 mostly declined. 

Cotton-VSF price spread narrowed after temporary cotton reserve suspension, but enlarged after Oct, 2017. Cotton price stabilized and VSF price shed, coupled with expected start-up of more than 1 million tons of VSF capacities, cotton-VSF spread is predicted to enlarge further. Cotton-PSF spread will fluctuate around 7000yuan/mt, so cotton has no price advantage. 

Three, World cotton market dynamics.Chinese and US cotton occupy one third of international circulating cotton stably. Therefore, the report issued by U.S. authoritative UDSA has a significant impact on international cotton prices. 

The first assessment of 17/18 was issued in May, 2017, which excluded China¡¯s final inventory of 1.45 million tons and then increased the data to 2.6 million tons in September. The data began to decline month by month from October. The Cotlook A Index trended in line with the report. 

Currently, major contradiction hasn¡¯t been solved in U.S., but the remaining extremely low micronaire value will become a problem. 

Pressure from the 1.9 million tons ending stock of 2017/18 crop year (outside China) will definitely explode, and it may occur around Aug given planting climate in the northern hemisphere develops as reported. 

In 2018/19 crop year, international cotton supply merely marginally outweighs demand after China lifts the quota restriction, hence impact from climate and disasters will be magnified. If China doesn¡¯t let go of the quota policy, 3 million tons stock for 2 consecutive years may lead to slump in cotton price. 

Four, Binary structure under policy background. Two questions are referred: Cotton quota to increase or not and Whether the state cotton reserves be implemented. 

If cotton quota policy sustains, China cotton consumption is short by about 1 million tons, while state reserve stock is enough to fill the gap. But structural shortage is expanding, whether it¡¯s due to a lack of high quality material to shoot up cotton price or dragged by inundant low quality goods? 

Ending stock of 2018/19 crop year is to increase 1 million tons outside China. Nearly 3 million tons cotton stock increment in two years is projected to cause slump in cotton value. 

Overall, carry over stock declines, link between China and foreign market strengthens, but inventory level is ample. Cotton price diverges in China, and the value is expected to be stable-to-weak. 

If cotton quota increases, China cotton consumption is short by about 600kt, while state reserve stock is enough to fill the gap. Newly increased imported cotton could fix part of China¡¯s structural shortage. Cotton supply is sufficient, and cotton price is easier to fall than rise after new cotton output is confirmed.¡¡ 

Ending stock of 2018/19 crop year is to increase 670kt outside China, which is shared by various countries. Asian textile industry may keep developing at high speed. Supply and demand in international market is nearly balanced. Market may see periodical volatility. 

Overall, carry over stock declines, link between China and foreign market strengthens, quota increases, but inventory level remains ample in China. Fluctuating range of cotton price widens and it¡¯s difficult to see continuous uptrend. 

If the state cotton reserves policy is not implemented, while the state cotton auction policy continues in 2018/19 crop year: After the 2017/18 state cotton auction, the carry-over stocks of reserved cotton are projected at 3.29 million tons, including 1.75 million tons of Xinjiang cotton and 1.54 million tons of upcountry cotton, which is sufficient to fill the gap. Nevertheless, after 2018/19 state cotton auction, the stocks left will not be enough to fill the gap in 2019/20 crop year, so transactions of reserved cotton in the late period of auction in 2019 are expected to increase, pushing up the prices. 

2. If the state cotton reserves policy is implemented, and the state cotton auction policy continues in 2018/19 crop year: Domestic social supply has deficit. If the state cotton reserves policy is implemented in 2018/19 crop year, Chinese and imported cotton will flow into the state warehouses, then new cotton supply may be tight on spot market. Even if the state cotton auction continues, the cotton prices are supposed to rise around the period of state cotton reserves. 

Five, Conclusion.Short-term price estimation: shiver in narrower range 

(1) Carry-over stocks of reserved cotton are relatively sufficient. Currently, the market is oversupplied, and ZCE cotton futures market also has large warehouse receipts pressure. Even there is speculation on forward contracts, it is hard to flow through to downstream sectors and stimulate consumption. Therefore, spot cotton prices and ZCE cotton futures may shiver in narrower range. The periodical speculation can help to consume stocks periodically, leaving space for spot cotton and warehouse receipts. (2) Severe weather disaster is force majeure to lead to the cotton output reduction in global market. 

Medium-to-long-term price estimation: breaking through the fluctuating range and prices are related with domestic and international markets 

(1) The changes of cotton quota and state cotton reserves/auction policies will lead the prices to break through the fluctuating range, but it is more likely to appear when the two policies are both appeared, easing the negative impact of volatile prices on spot market. As state cotton reserves policy is adjusted directly, while cotton quota policy is regulated indirectly, cotton prices may be relatively strong in medium-to-long term (late period of 2018/19 crop year). (2) The effect of trade war between U.S. and China may appear in 2018/19 crop year. Imports of U.S. cotton are less than 500kt, having little impact on Chinese market. (3) Output of competitive raw materials increases, especially viscose staple fiber, so the price edge of cotton is dampened. But except significant technical changes, the squeeze among raw materials is limited. 
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