How will cotton and VSF affect each other when they are both weak?

The price of cotton has fallen sharply in one month, from more than 20,000yuan/mt to less than 15,000yuan/mt, which is even lower than that of VSF. However, VSF does not seem to be influenced significantly, why?

There is a common perception in the market that the price of cotton is higher than that of VSF, and there is correlation between the two, but is this really the case? It appears to be “abnormal” that the price of cotton and VSF has been much close recently and due to the continued high price of cotton from 2021 to the second quarter of this year, the price difference with VSF has hit a record high of more than 10,000yuan/mt. According to the so-called correlation, the price of VSF should have been expected to rise notably, but it fails to jump on the bandwagon. Looking backwards, VSF had been higher than cotton for a long time in the past two decades.

Although the properties of cotton and VSF are the closest in terms of wearing performance, in terms of production, cotton is an agricultural product, and its output has been fluctuating over the years. The supply is mainly affected by policies and climate, while VSF as an industrial product whose output has doubled in the past decade, and the producers will adjust the operating rate and control the production accordingly according to the situation of raw materials and market volatility.

So in the current state, how will cotton and VSF affect each other?

According to the price difference and correlation mentioned above, VSF price falling below 13,000yuan/mt seems to be a “reasonable” level. However, the uptrend of VSF and pulp is almost the same this year, that is to say, the profit of VSF plants has not changed much, with theoretical profit still above 1,000yuan/mt. There is extremely low probability for VSF to further drop by 2,000yuan/mt when pulp price does not drop significantly because the sharp price reduction will trigger VSF companies to cut or suspend production. Moreover, the number of VSF companies that have reduced production is already rising, with the operating rate falling from 80% to 67%.

As for the substitution between cotton and VSF by downstream users, which is more concentrated in the companies that have been producing the two types of products for a long time and the overall impact on the pure-spun market of the two is limited. With the decline of VSF price, the spread with cotton has widened again and the selection by downstream plants is expected to be determined by their own operation and order-taking.