Production cut of cotton yarn moves closer

A half of Mar has passed, but it seems that the peak season is further and further away from cotton yarn market and the anticipation of market participants is diminishing. Cotton yarn mills generally keep normal production, but they are more strongly expected to reduce production later. 

1. High inventory weighs on cotton yarn mills severely.

Cotton yarn inventory has reached historical high level now. In general, as peak season comes around Mar, cotton yarn inventory moves down. However, it is not effective this year. It only dipped right after Spring Festival holiday, and then kept rising. By now, the inventory in cotton yarn mills is about 20-30 days, some higher over one and a half months, which imposes tough pressure on the mills.

2. Continued great losses depress the impetus of production.

The losses in spot profit of cotton yarn mills have sustained for about five months since last Oct, and stayed over 1,000yuan/mt, and 3,000yuan/mt at most. The sound profits in 2021 could only make up short-term losses. As the losses continue, cotton yarn mills get less and less active to produce. It has been the biggest problem for cotton yarn mills.

What determines the production cut of cotton yarn mills is mainly poor sales and thin profit. Why do cotton yarn mills persist in production under great losses and high inventory for so long time? It is thought related to time and expectation. According to an experiential spinner, “if the orders do not improve at the beginning of Mar, there is nothing worth being expected this peak season.” But the traditional peak season has not finished after all, so it is still possible for cotton yarn market to turn better later. In terms of the expectation, cotton price keeps firm currently and market participants mostly believe that it is not likely to drop largely in a short term. So as long as cotton price stays strong, cotton yarn will not decline further. On the contrary, if the market turns better, cotton yarn price may increase. In a word, “Until all is over ambition never dies”. In fact, if the orders continue current situation in one to two weeks, production cut is predicted to increase evidently. According to CCFGroup, end-user orders have not shown signs of improvement, and some even turn thinner, and the turbulence of international situation also restrains the possibility to surge. In addition, the consumption in China local market is hard to recover amid economic slowdown. As a result, Golden Mar and Silver Apr is not expected to come, and for cotton yarn mills, they are closer to cut production.

Facing such huge losses, cotton yarn mills will not just sit around. How will they make the profit positive? Production cut will be the first choice. Amid poor downstream demand and high cotton yarn inventory, cotton yarn price hardly rises. The only support from cotton is weak at present as there is no speculation opportunity for the surge of cotton. If cotton price declines with the decrease more than cotton yarn, the profit of cotton yarn may turn better. Production cut is the best way to realize that. As cotton demand reduces alongside the reduced production of cotton yarn, cotton price will drop. Even if cotton yarn follows to inch down, the slide will be limited amid reduced supply. Thus, the profit of cotton yarn mills will improve. It is ideal if the demand surges.