Chinese cotton prices rise after the holiday following the ICE cotton

During the Spring Festival holiday, the ICE cotton futures market saw a significant increase, with the Mar and May contracts up by about 800yuan/mt on Feb 16 compared with Feb 8, once the maximum increase reaching around 1,200yuan/mt (all the RMB price under 1% tariff). This was mainly due to the good progress of the 2023/24 U.S. cotton export sales, as well as the continuous upward adjustment of the U.S. cotton export expectations in the USDA balance sheet for January and February 2024. The ending stocks of U.S. cotton for the 2023/24 season remained relatively tight, shoring up ICE cotton during the holiday based on these fundamentals. However, the performance of ICE forward contract was notably inferior to that of nearby contract. In mid-Feb, the USDA Agricultural Outlook Forum expected a 7.5% increase in U.S. cotton planting area for the 2024/25 season compared to the previous season, with a significant decrease in the abandonment rate. The expected increase in U.S. cotton production for the 2024/25 season was 28.7% compared to the previous season. The actual production for the 2024/25 season will still depend on the planting progress and weather conditions in the later stages, but currently, the pressure in the forward market is stronger than in the nearby market.

Following the surge in ICE nearby cotton contract during the Spring Festival, the price spread between Chinese and foreign cotton prices quickly widened. As of Feb 16, the price spread was around -1,688yuan/mt (Chinese cotton price minus international cotton price), an increase of approximately 1,142yuan/mt compared to Feb 7. On the first working day after the Spring Festival (Feb 18), Chinese spot cotton prices have also risen, with an increase of around 425yuan/mt compared to before the holiday. Transactions are mainly conducted at a fixed price, but overall trading volume is low, as many market participants are adopting a wait-and-see approach until the opening of the ZCE cotton futures market. The current increase in spot cotton prices is in line with the expectations of many market participants for the first trading day after the holiday. Some market players expect that ZCE major cotton contract may rise to 16,300-16,500yuan/mt on the first trading day returning from the holiday.

There is a divergence of views on the future trend of ZCE cotton after reaching the expected levels. Some are gradually hedging around 16,500yuan/mt or higher on the CF05 contract, while others have hedging intention around 17,000yuan/mt. Some market participants believe that post-holiday downstream demand may not meet expectations, while others think that travel and home textile-related consumption remains strong, indicating good demand.

The current situation of downstream demand is difficult to confirm or refute, but with strong ICE market trends, low stocks of raw materials and product for downstream spinning mills, some large mills having orders until the end of Mar, and some new cotton being hedged before the holiday, the pressure on hedging is gradually easing, and there are fewer bearish factors in the domestic cotton market in the short term, leading to a potentially strong market performance. The future trends will depend on the extent of profit recovery for spinning mills and foreign market demand. If spinners' profits deteriorate significantly again, or if high foreign cotton prices clearly impact foreign market demand, Chinese domestic cotton prices may reach a short-term peak, while the medium to long-term outlook will depend on actual end-user demand.