How much room for cotton yarn price to decline –
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How much room for cotton yarn price to decline

2018-07-05 08:56:15 CCFGroup

Cotton yarn price shows downward trend of late as cotton price tumbles and downstream demand weakens. So far, its decrement stands less than that of cotton, but downstream demand can lend limited support to cotton yarn price in traditional slack season in Jul, so it has large potential to tail off further. We will talk about it in terms of profits and imported yarn.

1. Profits

Profits of cotton yarn by varities
Unit: Yuan/mt Quality grade Price Profit
OEC10S Quality air-jet 15,600 -30
OEC21S Quality air-jet 17,700 -334
Carded 21S High-grade 23,000 1336
Carded 32S Rapier 23,500 366
High-grade 24,700 726
Bleachable 25,700 862
Carded 40S Rapier 24,000 -350
High-grade 25,700 400
Bleachable 26,700 520
Compact-spun carded 32S High-grade 25,500 1026
Compact-spun carded 40S High-grade 26,800 1326
Combed 32s Knitting 26,700 185
Combed 40S Knitting 27,700 145
Compact-spun combed 60S For home textiles 34,300 750
100% bleachable 36,700 1327

At present, cotton inventory in spinners stayed at 1-2 months by and large. The above profit was calculated on basis of average cotton price in one and a half months and actual cotton content in cotton yarn production.

Currently, most varieties enjoy good profit with some low-end and open-end ones lower or even suffering losses. The market experiences obvious divergences. In short run, if cotton yarn inventory keeps accumulating, the discounts of conventional products will be within 500-800yuan/mt, providing no large change in cotton and downstream demand.

In other situation, such as unfavorable market environment, the mills do not have to sacrifice their profits. Extremely, they may operate at a loss. Here, we only discuss the decline room on current market. For example, unit profit of compact-spun combed 60S performs well, but its output stays low. The daily profit conversed into 10,000 spindles is not as good as conventional products. Additionally, the downstream demand was unabated and spinners’ inventory shows tightness, so the price is and will keep stable. Now what we talk about is how far to get the break-even bottom line of cotton yarn.

2. Imported yarn

Recently, price of forward imported yarn falls, but as Chinese Yuan against US dollar depreciates, settlement cost of traders continues rising. During Jun 14-29, Chinese Yuan against US dollar depreciated by 3.43% and cost of cotton yarn carded 32S increases about 800yuan/mt, offsetting the profit expansion brought by previous price rise. Therefore, price of imported cotton yarn moves up by around 300yuan/mt.

Arrival cost and ordering cost of imported cotton yarn
Unit: Yuan/mt Arrival cost (based on 2-month forward exchange rate) Arrival cost (based on spot exchange rate ) Ordering cost
Imported Vietnamese carded 32S for air-jet 23,800 24,900 26,200
Imported Indian carded 32S for air-jet 23,200 24,300 25,100

If arrival cost is calculated on basis of two-month locked foreign exchange rate, the traders will share considerable profit and cotton yarn price will have room to decrease. But most traders settle by spot exchange rate on current market, so they are hard to profit and even suffer slight losses. In terms of prompt ordering cost, price of forward imported cotton yarn is up to 1,000yuan/mt higher than spot one, and even much higher than domestic one. To gain profit, the first choice for traders is to reduce cost. But China-US trade fraction intensifies and Chinese Yuan is likely to further depreciate, so the ordering cost will be hard to retreat. Another choice for traders is to raise selling price sharply. Thus, downstream demand will largely shift to domestic cotton yarn, underpinning domestic cotton yarn price. However, amid slack season, it is difficult and even impossible to raise offer largely with stocks of imported cotton yarn mounting, which will result in losses to traders. As a consequence, traders will be less active in ordering and imports reduce. At last, less arrivals will promote demand to shift to domestic cotton yarn, lending support to domestic cotton yarn price further. In conclusion, domestic cotton yarn price will gain much support in terms of imported cotton yarn.

3. Conclusion and outlook
From the perspective of profits, prices of most cotton yarn have wide room to reduce. On the other hand, imported cotton yarn provides strong support to improve cotton yarn price recently. However, the pressure from demand on domestic cotton yarn price is more than the support it gets, while the profits cannot be offset completely. Cotton yarn price is predicted to keep dipping.