The latest data shows that U.S. cotton weekly exports have reached a total of 2.32 million bales, an increase of 60% year-on-year. This may be related to China’s import quotas at the end of the year, and purchases will be significantly reduced after February next year.
The latest data shows that U.S. cotton weekly exports have reached a total of 2.32 million bales, an increase of 60% year-on-year. This may be related to China’s import quotas at the end of the year, and purchases will be significantly reduced after February next year. In India, due to the impact of currency reform, new flowers have been launched slowly. However, the market outlook for new flowers is under great pressure, and cotton prices have fallen.
1. The inventory turning point is the fundamental driver of the rise
In March this year, Zhengzhou cotton finally reversed the previous long five-year bear market; so far, it has shown a volatile rising pattern. This year may be the beginning of an upward cycle, playing a role in connecting the past and the next.
There are two factors that accelerated the bottoming out in the second half of 2015: 1. The direct subsidy policy (19,100 yuan/ton) continued to be adopted for cotton producers, prompting domestic cotton prices to return to market-based pricing and align with international standards; 2. , The huge state reserve inventory (more than 10 million tons) needs to be digested, and the state reserve cotton will be rotated out in the future.
By 2016, positive factors in the market finally emerged: 1. In terms of output, my country’s planting area has declined for five consecutive years, and output is expected to decrease again to 4.57 million tons. 2. In terms of inventory, the huge inventory reached an inflection point last year, indicating the arrival of the destocking stage. With domestic demand steadily recovering, the balance of supply and demand has finally tilted towards the bulls. 3. Domestic stockpiling. Due to the slow pace of public inspection at the beginning of the period, the amount of investment was insufficient; at the same time, there will be no additional issuance of import quotas. As a result, transactions were active and prices climbed.
In short, production in China and the world is insufficient to meet demand, and huge inventories are gradually being digested. This is the internal motivation for the rise. Global “destocking” is also the driving theme of the market in the next 3-5 years.
2. The situation faced by the cotton market at the current stage and in the later period
On the supply side, harvest season pressure remains
From the Chinese perspective:
At present, domestic cotton picking is almost over, and there will be pressure on sales later. In the early days, it was difficult for Xinjiang cotton to leave Xinjiang due to limited transportation capacity, but by the end of December, this problem will be alleviated. Recently, the number of cotton registered warehouse receipts on the Zhengzhou Stock Exchange has increased. The latest data is 637 (about 25,500 tons), and the effective forecast warehouse receipts have increased to 1,441 (about 57,600 tons). If the main contract 1701 rises above 16,000 yuan/ton, then there will be a profit compared with the purchase price (cost is 14,600-15,100 yuan/ton), and the hedging pressure will increase; if so, then it will be picked up in January next year. The pressure on the firm offer will increase greatly. In addition, the 1% import quota will be used up by the end of February next year. Due to the price difference between domestic and foreign cotton (high inside and low outside, the price difference reaches 2,000 yuan/ton), this will cause import pressure during this period. According to the USDA report, China’s 2016/17 opening inventory is still relatively large, reaching 12.68 million tons (the inventory/consumption ratio is 166%).
From a global perspective:
According to the USDA report, global cotton production increased in 2016/17, with an increase of 1.48 million tons, reaching 22.51 million tons; if China’s production and consumption data are excluded, global supply is slightly surplus. In addition, judging from the output of India and the United States, both have increased. As harvest progresses, a large amount of cotton coming to market will bring downward pressure.
In terms of demand, winter is the peak purchasing season for the textile industry. In order to cope with the production orders of spring clothing, downstream companies generally have restocking and purchasing needs in November and December.
Textile companies had replenished a large amount of state cotton reserves before September. By the end of November, it was basically exhausted. At present, textile companies are in urgent need of replenishing their inventories, and more companies are visiting Xinjiang for inquiry and purchase, which has boosted the confidence of ginners. In addition, the purchase cost of new cotton is generally around 15,000 yuan/ton. In this way, the market will have strong cost support before selling off reserves in March next year.
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