China state cotton auction review in July, 2021

The China state cotton auction policy has been implemented from July 5, 2021, lasting to September 30, 2021, with a total quantity of 600kt. The policy maintains the normalization and mechanism and it is in line with the market regulation. So far, the state cotton auction remains hot. This insight report will analyze from the trading volumes and prices of reserved cotton, reserved cotton quality, and participation of spinning mills and traders, to figure out the structure of reserved cotton.

I. Summary of state cotton auction from Jul 5 to Jul 30

1. Trading volumes and prices of reserved cotton

In July, the trading sentiment of reserved cotton at auction continued to be active, with the daily trading proportion at 100% per trading day, and the trading prices were also in upward trend.

The reserved cotton at the auction was Xinjiang cotton and upcountry cotton, and there was no imported cotton till now. And the reserved cotton was mainly from 2012/13 season, 2013/14 season and 2019/20 season. From July 5 to July 30, 191.1kt of reserved cotton was totally transacted via auction, accounting for 31.85% of the total planned quantity. The daily selling volumes were average, basically at 9,500-9,600 tons. The trading volumes of Xinjiang cotton totaled 125.7kt, about 65.75% of the selling volumes and that of upcountry cotton were 65.4kt, about 34.25%. In addition, from July 14, small quantity of 2019/20 reserved cotton appeared, and the total trading volumes were 14.9kt by now. 2013/14 reserved cotton was the major selling variety, with a total volumes of 168.4kt, accounting for 88% in total selling volumes.

In terms of price, the trading prices of reserved cotton was consistent with the trend of Zhengzhou cotton futures, up in fluctuation overall. Currently, the continuous major contract of ZCE cotton is in the range of 16,350-17,180yuan/mt, and the average trading prices of reserve cotton is in the range of 16,331-17,504yuan/mt, both reaching the highest on July 29, at17,600yuan/mt and 17,504yuan/mt respectively. From July to July 30, the weighted average trading price of reserve cotton was 16,784yuan/mt. The base selling price of reserved cotton is also increasing steadily every week. The base selling price was 16,514yuan/mt during August 9-13, which was up 1,013yuan/mt from the first week. The continuous active trading of reserve cotton and the rigid demand from spinning mills will also support the cotton futures market. There is a complementary relationship between the spot cotton market and the futures market. Currently, spot cotton prices are relatively strong and difficult to fall, which benefits cotton futures market, and the rise of futures will drive the spot price upward, which will affect the base selling price of reserved cotton to some extent.

2. The quality indicators of reserved cotton

During July, the reserved cotton sold was mainly the Xinjiang cotton in 2013/14 season, accounting for more than half, with a selling volumes of 103.9kt, The reserved upcountry cotton was all from 2013/14 season, accounting for 33.73%, mainly from Hebei Province, with a volume of 17.6kt.

For the color indictors, the yellow stained cotton accounted for the largest proportion as the most cotton was from 2013/14 season. But as there were small quantity of 2019/20 cotton, some reserved cotton was with good color indicators, white grade-3 cotton, white grade-2 cotton and white grade-1 cotton, with selling volumes of 11.9kt, 2.6kt and 0.3kt respectively.

In terms of the length and strength, reserved cotton with high quality was limited in July. The proportion of cotton with length above 29mm and strength above 29gpt was less than 5%, and that of cotton with length 28mm and 28gpt was only 10.8%. The strength was mostly below 27gpt. The trading prices of reserved Xinjiang cotton with length above 29mm and strength above 29gpt were close to the current 2020/21 cotton, and reserved cotton with other quality has price edge compared with spot cotton.

3. The trading volumes and participation of spinning mills and traders

In July, 199 enterprises participated in the reserved cotton auction, including 127 spinning mills, with a total trading volumes of 64.1kt, and 72 traders, with a total trading volumes of 127kt. In early July, more spinning mills participated in the auction, but later, as traders gained profits from the auction and its capital structure was better than spinning mills, so they continued to take part in, to be the dominant force.

II. Summary of state cotton auction in July and situation analysis

1. Summary of state cotton auction in July

From July 5 to July 30, 191.1kt of reserved cotton has been totally transacted, accounting for about 31.85% of the total planned selling volumes this year. Reserved Xinjiang cotton was the major selling variety during the month, with a trading volumes of 125.7kt, accounting for 65.75%. In terms of the crop year, the reserved cotton was mainly from 2013/14 season, accounting for 88%. The weighted average trading price was pegged at 16,784yuan/mt. The quality structure of the reserve cotton in July was relatively average. The major color indicators were yellow stained, a nd the proportion of reserved cotton with length above 29mm and strength above 29gpt was less than 5%. Traders gained more reserved cotton in July, about 127kt, taking a share of 66%, and spinners gained 64.1kt.

2. A brief analysis of reserved cotton auction in July

From the perspective of the overall supply and demand of the cotton market, supply has increased somewhat in July, with the start of state cotton auction on July 5 and the allocation of sliding-scale duty quotas from July 21, but it has no big impact on the cotton prices. By contrast, with the continuous active sentiment of reserved cotton, reserved cotton prices are in upward trend, stimulating the spot cotton market. Chinese cotton prices are likely to keep up, especially for high-grade cotton. Nevertheless, there will be other influencing factors to fluctuate cotton prices, such as expectations over 2021/22 cotton, epidemic situation in China and overseas markets and weather condition.

On spot cotton market, the demand for cotton remains good, and some domestic spinning mills require high-grade cotton. However, the spot cotton market has limited quality cotton at present, and the reserved cotton auction is mainly from 2013/14 season. The quantity of high-grade cotton is limited, which may lead to larger price spread between high-grade and low-grade cotton. High-grade cotton prices are supposed to keep upward later.