Cotton yarn’s happiness mixed with concerns under nosedive of cotton

ZCE cotton futures stepped into plunge from the second half of Jun with the most decrease reaching 3,800bps or 19% in two weeks. Facing cotton’s slump, cotton yarn market moved into ice-cold territory with price tumbling. However, happiness and concerns come together.

Concerns: difficult to be traded and high inventory which depreciated quickly under slump of the market

Amid soft demand in slack season, the nosedive of ZCE cotton futures triggered more panic sentiment on the market and slowed down downstream procurement of raw materials. Especially last Thursday and Friday, cotton yarn trades almost stagnated and cotton yarn mills mostly stopped offering. Cotton stabilized slightly this week and the trades recovered somewhat. Downstream continued to buy based on demand. If cotton does not plummet any more, market confidence may be beefed up, as well as the trade volume. What’s more trouble for cotton yarn mills is the depreciation of cotton and cotton yarn stocks. Compared with that last week, spot cotton declined by 1,700yuan/mt and cotton yarn moved down by over 1,000yuan/mt. Based on current average 21-day cotton inventory and 42-day cotton yarn inventory, a carded 32S producer with 10,000 spindles will see a depreciation of 300,000 yuan in a week.

Happiness: spot profit returns to positive side, possibly indicating the toughest time has gone.

As cotton price plunged, spot profit of cotton yarn finally turned positive. Although cotton yarn mills are still at losses by using cotton stocks in fact, it will not take long for them to profit or achieve breakeven at least with the consumption of high-priced cotton and the sales of high-cost cotton yarn.

Nevertheless, it is still difficult to profit much under the background of sluggish demand in and outside China. At present, the operating rate of cotton yarn mills stays at record low, and a lot of small spinners are in shutdown. Due to the sharp fluctuation of cotton, more small mills suspended production. If the demand improves and the profit resumes, the operating rate may be raised and the supply will increase in addition to current high inventory, but the demand is still paled, so cotton yarn price will be hard to move up rather than decline.

On the other hand, cotton yarn made of imported cotton is little influenced. Its price stays firm. At present, cotton yarn made of US cotton has been about 4,000yuan/mt higher than that made of Xinjiang cotton, and spot US cotton in China has been 6,000yuan/mt higher than Xinjiang cotton. In addition, cotton yarn made of imported cotton yarn receives better export orders. If the rumors that state imported cotton reserves are to be sold are realized, the price spread between import cotton and Xinjiang cotton will narrow and the responding cotton yarn price will decline.