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Expected and unexpected slump on ZCE cotton futures

2019-07-11 09:06:56 CCFGroup

Zhengzhou cotton futures market hits the down limit on July 9, and there is no great bearish news temporarily. In short, the decline of cotton market is expected to see, but the down limit is beyond our anticipation. From last week, the demand for cotton from downstream is in a very slow recovery, and transactions reduce. The previous improvement is supposed to be the speculative demand after the Sino-US top level meeting during G20 Summit. Cotton inventory remains at a high level, weighing on cotton market.

Feedstock from market players
1. Ginning factories
Ginners were active to sell, but trading volumes were limited, so the capital pressure was seen gradually as the inventory occupied the capital, and loans needed to be paid. It is the peak season to pay loans during July and August, and moreover, there is still competition from the imported cotton and reserved cotton. T herefore, the capital pressure for ginners is seen. Nevertheless, the pressure is not great as anticipated, as large ginners’ loan can be prolonged somewhat. But for small ginning factories, there is indeed the capital pressure. Of course, some ginners have cut prices to promote sales, but the sell-off is disperse and scattered. So, the sharp decline is not caused by the ginners.

2. Traders
Traders are the major physical cotton holders currently, and there are two transaction modes, traditional fixed price basis, and the on-call. Besides, traders also do hedging to have profits. Their operation is relatively flexible. Prices of cotton at fixed price basis are stable to decrease, and on-call cotton is the major transacted one.

3. Spinning mills
From mid or late June, mills continue to procure cotton on need-to-basis, as yarn orders and sales have not improved much, so the demand for cotton is mild. Spinners that produce conventional cotton yarn are inclined to use reserved cotton. The volatile cotton market is not good for them to procure large quantity of cotton, in face of depreciation risks.

4. The strong rebound on June 10 and predication on longs lacking confidence
The uncertainty of the rebound in Jun is relatively large, as the consumption is needed to verify. The rebound is seen after the de-stocking of yarn market has some effects and Sino-US trade relations tend to ease somewhat before the G20 Summit.

After G20 Summit, the macro economy indeed shows some good news, but the consumption for cotton is not recovered quickly, and according to its speed, the overall commercial inventory will still be higher compared to the corresponding period of last year before the arrivals of new cotton. Downstream market has not improved much, especially grey fabric market. Meanwhile, cleared foreign cotton prices under sliding-scale duty are higher than the current imported cotton that has been cleared, which means that there is no chance for mills to use sliding-scale duty quotas, and 800kt of sliding-scale duty quotas may be delayed to be used. Meanwhile, the monthly cotton imports are large in recent months, and cotton imports may keep good, as Brazilian cotton inventory is ample and new cotton has arrived, and intensive arrivals of Australian cotton will see as well. Cotton inventory in bonded areas is heard to be large, to reach 400-450kt in general. Mills may have no demand to procure forward shipments, so the new buying from China to the international cotton is expected to be weak. In short, the cotton market lacks upward momentum and the uncertain macro economy will influence the market.