China cotton supply and demand structure and price trend analysis
！！Xia Shihui, Zhejiang Huarui Information Consulting Co., Ltd
2018-06-22 17:34:57
Xia Shihui, Zhejiang Huarui Information Consulting Co., Ltd, presented her report of China cotton supply and demand structure and price trend analysis
Her report was divided into four parts.
Firstly, China cotton market and state reserved cotton auction. Currently, reserved cotton stocks are at a reasonable level, long-term supply gap exists, cotton prices rise largely, and liquidity declines. Traders are forbidden from bidding for reserved cotton from Jun 4, and an additional 0.8 million tons quota will be issued soon. Thus, cotton price retreats somewhat. Supply is assessed to be higher than demand in 2017/18 crop year and commercial stocks reach high level. If 0.8 billion sliding-tariff quotas are all for import, total supply will approach 9.46 million tons. In 2016/17 crop year, the turnover was 3.23 million tons, the remaining amount was 5.26 million tons. In 2017/18, commercial inventory was relatively high. Considered the reserved cotton, the minimum ending stock is already higher than the opening stock. Affected by weather, planting area and lowering stocks, open interest of futures market soared and market liquidity weakened. Then due to policy and China-US trade war, futures market was hit and warehouse receipt reduced.
Secondly, 2018/19 China cotton market supply and demand balance and potential issues. China cotton planting area totals 42.18 million mu in 2018, down 4.43% y-o-y. The weather remained poor in May, but the overall loss was not significant visually, and the increase or decrease in per unit yield was not yet known. Quota has positive correlation with import volume. Cotton import volume in 2019 will be similar with that of the recent two years if quota increment in 2019 is close to that in 2018. The expected growth of China textile industry consumption slows down. Cotton-VSF price spread narrowed after temporary cotton reserve suspension, but enlarged after Oct, 2017. Cotton consumption growth is expected to decline and some capacities may be even eliminated in medium-long run. The difference between high and low-grade cotton consumption keeps enlarging, coupled with outstanding structural problem. Substitution effect of imported yarn over Chinese domestic yarn is limited in 2018. Market participants are suggested to focus on whether the price spread between Chinese domestic and imported yarn will form a trend. Under unchanged reserve & auction policy, and used up quota without serious natural disasters, the state reserve carryover stocks are enough to fill the gap. Since the deficit is small, reserve and auction is feasible. But there are still many uncertainties such as weather, quota and auction.
Thirdly, World cotton market dynamics. US cotton occupies one third of international circulating cotton stably. Therefore, the report issued by U.S. authoritative UDSA has a significant impact on international cotton prices. World supply demand is generally balanced in 2017/18 crop year. Exports among major exporters doesn¨t change much during 2018/19 crop year. Major importers are all Asian countries. So far, booking interest is strong in Asian market, due to the regional supply tightness. International cotton prices are generally high, so the US ultra low yards and India's low-quality cotton would gradually disappear.
Fourthly, Binary structure under policy background. 1. No cotton reserve in 2018/19 and auction continues. At that time, the spot market is oversupplied in short term but in short of supply in the long run, and then the competition between spot dealers and speculators is intensified. 2. Temporary reserve in 2018/19 and auctions continues. State-owned Reserves increases imported cotton, bringing in 2018/19 new cotton and selling old stocks. Prices rise quickly under the reserve expectations. Later on, there is high probability of maintaining the auction policy, and there may be a price range formed on long-term in 2018/19 crop year. High volatility in cotton causes part consumptions replaced by competitive fibers.
Her report was divided into four parts.
Firstly, China cotton market and state reserved cotton auction. Currently, reserved cotton stocks are at a reasonable level, long-term supply gap exists, cotton prices rise largely, and liquidity declines. Traders are forbidden from bidding for reserved cotton from Jun 4, and an additional 0.8 million tons quota will be issued soon. Thus, cotton price retreats somewhat. Supply is assessed to be higher than demand in 2017/18 crop year and commercial stocks reach high level. If 0.8 billion sliding-tariff quotas are all for import, total supply will approach 9.46 million tons. In 2016/17 crop year, the turnover was 3.23 million tons, the remaining amount was 5.26 million tons. In 2017/18, commercial inventory was relatively high. Considered the reserved cotton, the minimum ending stock is already higher than the opening stock. Affected by weather, planting area and lowering stocks, open interest of futures market soared and market liquidity weakened. Then due to policy and China-US trade war, futures market was hit and warehouse receipt reduced.
Secondly, 2018/19 China cotton market supply and demand balance and potential issues. China cotton planting area totals 42.18 million mu in 2018, down 4.43% y-o-y. The weather remained poor in May, but the overall loss was not significant visually, and the increase or decrease in per unit yield was not yet known. Quota has positive correlation with import volume. Cotton import volume in 2019 will be similar with that of the recent two years if quota increment in 2019 is close to that in 2018. The expected growth of China textile industry consumption slows down. Cotton-VSF price spread narrowed after temporary cotton reserve suspension, but enlarged after Oct, 2017. Cotton consumption growth is expected to decline and some capacities may be even eliminated in medium-long run. The difference between high and low-grade cotton consumption keeps enlarging, coupled with outstanding structural problem. Substitution effect of imported yarn over Chinese domestic yarn is limited in 2018. Market participants are suggested to focus on whether the price spread between Chinese domestic and imported yarn will form a trend. Under unchanged reserve & auction policy, and used up quota without serious natural disasters, the state reserve carryover stocks are enough to fill the gap. Since the deficit is small, reserve and auction is feasible. But there are still many uncertainties such as weather, quota and auction.
Thirdly, World cotton market dynamics. US cotton occupies one third of international circulating cotton stably. Therefore, the report issued by U.S. authoritative UDSA has a significant impact on international cotton prices. World supply demand is generally balanced in 2017/18 crop year. Exports among major exporters doesn¨t change much during 2018/19 crop year. Major importers are all Asian countries. So far, booking interest is strong in Asian market, due to the regional supply tightness. International cotton prices are generally high, so the US ultra low yards and India's low-quality cotton would gradually disappear.
Fourthly, Binary structure under policy background. 1. No cotton reserve in 2018/19 and auction continues. At that time, the spot market is oversupplied in short term but in short of supply in the long run, and then the competition between spot dealers and speculators is intensified. 2. Temporary reserve in 2018/19 and auctions continues. State-owned Reserves increases imported cotton, bringing in 2018/19 new cotton and selling old stocks. Prices rise quickly under the reserve expectations. Later on, there is high probability of maintaining the auction policy, and there may be a price range formed on long-term in 2018/19 crop year. High volatility in cotton causes part consumptions replaced by competitive fibers.
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