Reasons behind the recent rising ZCE cotton futures

Since Aug, ZCE cotton futures begin to stabilize and then rally strongly. The major cotton contract, Jan contract, has risen from 14,560yuan/mt on Aug 1 to 15,510yuan/mt on Aug 15, with an increase of 6.52%, and Chinese 3128 cotton price also moves up from 15,255yuan/mt to 15,860yuan/mt, with an increase of 3.97% during the same period. The rally is mainly attributed to the improved macro environment, support from ICE cotton futures and better Chinese cotton yarn sales.

In terms of the macro environment, U.S. consumer price index rose 8.5% in July from a year ago, below market expectations and the producer price index declined to 9.8% in July from 11.3% from June. The inflation pressure was eased a bit, and panic mood triggered by the US Fed’s hike on interest rate slowed down somewhat, giving strong momentum for ICE cotton futures, supportive to Chinese market.

Looking from the cotton textile industry, on one hand, with the stabilizing cotton prices, easing macro environment and coming traditional slack season, cotton yarn sales have started to turn better gradually since late July. According to CCFGroup, downstream fabric orders increase somewhat recently in Guangdong, Zhejiang and Jiangsu markets, so fabric mills increase the purchasing volumes of yarn. Barring the fabric mills, some traders also purchase for preparation of buoyant season. Traders with low inventory start to replenish yarn gradually. Cotton yarn inventory reduces from 45.7 days on Aug 1 to 44.7 days on Aug 15, and cotton grey fabric inventory also decreases from 49.5 days to 47.3 days during the same period.

On the other hand, Chinese cotton market is much spurred up by the ICE cotton futures during the period, which performs much firmer than Chinese market. The drought condition persists in Texas, and plant health has deteriorated. By Aug 9, according to USDA, Thirty-one percent of stands were rated 'good to excellent', down from 38 percent the previous week; 35 percent were 'fair' (up one point), while 34 percent were 'poor to very poor' (up six points on the week). The proportion of the Texas crop categorized as 'good to excellent' declined to just 14 percent, a drop of 11 percentage points on the week, and 38 percent was 'fair', down one point. On Aug 15, USDA released its Aug supply and demand report, forecasting a lower U.S. cotton production in 2022/23 season. The U.S. cotton production is lowered by 640kt to 2.74 million tons, a historical new low, and the abandonment of cotton crops in U.S. reaches 42.9%, the highest rate in nearly 20 years. Impacted by this, ICE cotton futures hit the limit-up, and ZCE cotton futures market also moves up.

In general, cotton yarn and grey fabric sales improve, but prices keep weak. The higher replenishment for cotton from downstream spinners is supportive to cotton prices somewhat, but downstream demand is still weaker than the same period of last year. In Aug, macro environment improves, but the meeting of US Fed on interest rate will continue in Sep. in long run, end-user demand still faces pressure, and global cotton consumption also has downward space. In short, Chinese cotton prices may be firm somewhat.