Could cotton linter benefit from the recent cotton rally?

China cotton market has set off a wave of upsurge recently with a sharp rise of more than 1,000yuan/mt in a few days. In this case, market participants have placed hope on the stabilization and recovery of cotton linter.

Under the rumors of cotton commercial inventory shortage, the expectation of a sharp reduction in cotton production in the 2023/24 crop year, and high spirits of harvest rush. Coupled with the participation of various funds, the sentiment in China cotton market has been high recently, and prices have risen sharply. On Jun 1, ZCE cotton futures almost hit limit up, and it kept rising recently, from 15,500yuan/mt at the end of May to the current 17,000yuan/mt. During the same period, the spot price of cotton 3128 jumped above 17,100yuan/mt from 15,900yuan/mt, gaining ground by 1,200-1,500yuan/mt in just a few days. On the other hand, cotton linter whose previous trend was highly similar to that of cotton has seen more divergences recently, and prices seem to stop rising.

The recent performance of each link in the cotton and cotton by-product chain has been quite different. Among them, fibers are generally strong, while the downstream is mostly weak, and refined cotton price even drops instead of rising. The mainstream price of industry-grade refined cotton has fallen by 200yuan/mt to 9,400-9,600yuan/mt. Therefore, it is not easy for cotton linter to keep rising when downstream prosperity declines, especially the end-user demand of cotton linter pulp and refined cotton has not improved much.

To sum up, the surging cotton price has stimulated the bullish sentiment of related products. However, due to the differences in the supply and demand fundamentals, the performance of each link is not the same. If cotton price continues to rise later, cotton linter is likely to be pushed up. However, when downstream demand is weak at present, the upward momentum of cotton linter has been restrained, and there is no clear orientation for the time being.