Will market demand show up when cotton price stabilizes?

ZCE cotton futures plunged last week with CF09 contracts down nearly 3000bps in a week. It turned up and even hit up limit on Monday affected by macro environment, loan rollover of ginners and the limit-up of ICE cotton futures. However, it tumbled over 1000bps again on Jul 19. Therefore, cotton yarn mills and downstream weavers report that it is hard to operate and they have to stay on the sidelines. Furthermore, cotton yarn market becomes weaker.

Cotton yarn prices are mixed due to great divergences in cotton costs among the mills.

The sharp fall of cotton price induced great divergences of cost among cotton yarn mills. At present, the cost of cotton stocks of the mills averaged at 18,000-19,000yuan/mt, some higher at 20,000yuan/mt or above 21,000yuan/mt and a few lower at 16,000yuan/mt or around.

From the figure above, the cost of producing carded 32S was 23,400-29,000yuan/mt. If the cotton cost is controlled within 17,000yuan/mt, gross weight and delivered, the mills could achieve profit. However, most mills are still at losses of 1,000-2,000yuan/mt with cotton costs of 18,000-19,000yuan/mt. The mills with higher cotton costs offered higher while those with lower costs focused on sales and priced lower. Current prevailing traded price of carded 32S ranged in 24,500-25,500yuan/mt with the one for knitting relatively higher. Lower prices were seen at 24,000yuan/mt or below.

Orders for autumn and winter dominate China local market and prices of lower-count ones are relatively firm.

Recently, it is heard that downstream weavers are mainly processing the orders for autumn and winter and using cotton yarn with low counts. In addition, due to large spread between spot and forward imported cotton yarn, cotton yarn imports reduce and downstream weavers have changed to use Chinese cotton yarn instead of imported one. Under the background of increased demand and reduced supply, 32S and those with lower counts decline a bit less. 40S and those with higher counts were traded mediocrely and dropped a lot. In the meantime, combed 32-40S also see poor demand and the underselling on the market is heard to be centered in combed 32-40S. According to CCFGroup, the price gap between carded 32S and carded 40S which was 1,000yuan/mt in general has narrowed to less than 500yuan/mt.

Despite overall weak demand, cotton price still plays a significant role of buying interest of cotton yarn mills and downstream procurement. Most mills think 14,000-15,000yuan/mt was a rational range for cotton futures and it is profitable if buying for immediate production and selling. However, cotton is likely to depreciate quickly, and cotton yarn will also pile up and depreciate as downstream weavers are hesitant to buy amid changeable market. So some mills cut or suspend production, and some prefer to buy for rigid demand. When cotton price stabilizes, the market demand may be seen, including that for cotton, cotton yarn and cotton fabric.