How could soaring ZCE cotton affect cellulose fiber?

Yesterday, ZCE major cotton contract, Sep contract rose significantly, hitting limit up of 16,465yuan/mt, and finally closing at 16,400yuan/mt, an increase of 900yuan/mt from the previous day and setting a 11-month high. On the same day, most commodities were relatively strong, and the sharp rise in a single day attracted the attention of all parties. The cellulose market activity also partially improved yesterday.

Regarding the reasons for the rise in cotton prices, various institutions immediately gave different interpretations. Common reasons are: 1. cotton commercial inventory is lower than expected; 2. cotton production of 2023/24 crop year will decline; 3. the demand for cotton is acceptable, and there are worries over supply shortage; 4.even some suspicious rumors of procurement by large-sized plants have been cited as reason. The fourth point mentioned above does exist objectively to a certain extent, but it is not enough to explain why there was a concentrated outbreak yesterday, let alone why there was a plummet of about 1,000yuan/mt last week. At the same time, this explanation also lacks research on market entities. Yesterday, ZCE major cotton contract opened more than 1.5 million lots. Which participants are conducting such a large number of transactions is also very critical information. We still believe that the reason for the soaring cotton futures yesterday is still under investigation, but we still need to pay attention to the significant changes in any case. Generally speaking, huge positions will be matched with relatively strong bullish expectations. Market players are likely to be based on their own judgments and have higher expectations for cotton, so they will not hesitate to take long positions above 16,300yuan/mt on large quantity. At present, when the reasons are unknown and even more unfalsifiable, these participants are likely to push up the price further. At the same time, the good fundamentals of cotton in the medium term do provide a hotbed for a good mid-term trend.

For cellulose fiber, although we have done research on its correlation with cotton before, and the conclusion is that there is no long-term correlation between the two products, on annual basis, there is still strong correlations in some years. This situation generally occurs in years when there is less policy intervention in cotton and the price sees great ups and downs.

Since cotton has dropped above 20,000yuan/mt last year, the price difference between cotton and VSF has been narrowing. With the recent rise in cotton prices, the spread has reached a relatively high level in the past year. Moreover, the fundamentals of VSF are still tolerable at present, and the physical inventory of VSF plants is at a low level. The main resistance to limit the rise of VSF comes from the lack of hot spots in the downstream sector. If cotton price rises sharply, the confidence of the entire textile industry will be improved, and the weakness of rayon yarn will be changed, then VSF may achieve a breakthrough. Opportunities also exist for lyocell. At present, cotton/lyocell production is increasing. Whether it is cost, product concept or attributes, cotton/lyocell products have characteristics recognized by the market compared with 100% cotton products. If cotton prices continue to rise, the demand for lyocell is also expected to increase. Of course, the premise is that the price of cotton continues to rise. For products that are traded in futures market, it is difficult and unrealistic to draw a definite conclusion. But yesterday's sharp rise did change the previous dull atmosphere, whether it will rise further is noteworthy.