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Reduced supply cannot prevent the decline of cotton yarn

2022-04-29 07:50:55 CCFGroup

Overall cotton yarn market sustains previous weakness in Apr. Downstream orders reduced and weavers increasingly cut or suspended production, and on the other hand, the pandemic hindered the logistics and further hampered the trade. As market confidence is being depressed, more cotton yarn mills choose to curtail production. Thus will cotton yarn turn better as the production reduces? The answer may be “No”.

 

Increase in cotton yarn supply is expected to reduce.

The reduction of cotton yarn supply comes from the production contraction of China local mills, and also the decline of cotton yarn imports. At present, many small mills in Shandong are shut down, and medium and large mills also decrease the production increasingly. According to CCFGroup, the operating rate of cotton yarn mills has dropped about 14% points from year’s high and about 21% points from the same period of 2021. In addition, Q1 cotton yarn imports is expected to decline largely to about 380kt, down 160kt or 29% from the same period last year. As foreign cotton price stays higher than Chinese one, foreign cotton yarn prices will also keep high, and thereby Q2 cotton yarn imports of China is likely to drop further.

 

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Existing supply is sufficient.

Overall cotton yarn supply is sufficient despite less increase in later supply. At present, cotton yarn inventory has hit new high and exceeded the highest in 2019 and 2020. It was heard that many large mills already had two-month inventory which imposed great pressure, and the stocks held by traders were also consumed slowly. On the whole, comprehensive cotton yarn stocks are assessed at 1.1 million tons now. What seems comfort is that cotton yarn inventory in downstream weavers is low. Some fabric mills also face the risks of suspension of raw materials supply, but with poor orders and pessimistic expectation to market outlook, they are not eager to purchase.

 

The dull market is thought to be influenced largely by the pandemic, but will the demand improve much after the control on the pandemic gets eased? It will improve, but not much.

 

As things stand, the stagnation of logistics indeed hinders a part of demand. Some downstream fabric mills suspend production due to the shortage of raw materials actually, but it is just a small part, and more suspension of production is due to inventory pressure and scarce orders, so downstream replenishment of cotton yarn after the pandemic will still depend on the amount of orders and the increase in demand will firstly move to existing stocks. In conclusion, if the pandemic gets controlled and the logistics recovers, cotton yarn mills and traders will focus on destocking under high inventory pressure and cotton yarn price is expected to move down at that time.

 

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