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China cotton supply and demand structure and price trend analysis
!!Xia Shihui, CCFGroup

2019-06-14 12:06:41

The report is divided into four parts. 

1. Cotton consumption in China. 
Since 2015, the export market shares of China showed decline. The annual export value of textile accounts for about 12%-13% of the total output value of above-designated enterprises. In terms of domestic market, the production cuts and switching seem inevitable after the low-priced raw material advantage is lost even if the state reserved cotton supply delays the decline rate of cotton consumption. The trade war expedites the diversion and disruption of orders, and the weakening macro economy suppresses domestic trading activities, which leads to the congestion of the industry chain in short term, faster consumption structure adjustment and decline in cotton consumption since 2019. 

2. China cotton supply 
Output and consumption gap is supplemented by reserved cotton and imports over the years to ensure stable price. A sharp decline in low-price cotton was seen due to less state reserved cotton auction in 2018/19 and West Africa and Brazil cotton can be used as a substitute for stated reserved cotton to balance "quality". But the increment of imported cotton cannot balance the lack reserved cotton from the "price" by now, weighing down imported cotton basis, guiding international planting pattern to a certain extent. Reducing reserve, cutting subsidy and raising import can satisfy demand in view of quantity and quality. Supply is anticipated to remain excessive in recent 2 years. In addition, trade war restricts the imports of US cotton and China adds import quota in 2018/19 cotton season. Thus, overall market presents a pattern with weak domestic market and strong external environment. 

3. Far and near contradiction of supply and demand, cooperating with time cycle, driving price 
Medium-to-long run contradiction, short-term contradiction and macro risk are significant factors influencing cotton price. Physical cotton in commercial stocks (without on-call cotton) are excessive and too fast reduction of futures leads to scarce sources in circulation. Currently international cotton supply is short, but in the near futures, it will be adequate as a large amount of Australian and Brazilian cotton will flow to China. Trade war leads to order shifting to Southeast Asia to support local cotton buying, but China's domestic sales are weak to hinder international yarn flows. ICE's position structure is also temporarily not supporting a rise, the on-call sales are small, and the new cotton is scheduled to be placed in a high proportion of pending orders. The cotton planting in the countries are slow but improves. 

4. Conclusion 
The uncertainty of trade war leads to the infinite amplification of time cost fluctuation, so downstream consumption will become the main driving force for regression of futures and spot and regression of spread between prices in domestic market and overseas market again. For long-term conflicts, consumption transfer is inevitable. Import cotton has not been fully introduced, so the rival commodity replacement or the transfer of capacity to overseas markets may become a trend. The changes in subsidy policy leads to the reduced planting expectations of China¨s cotton in protection areas especially in Chinese mainland, manifesting the phenomenon of the decrease before planting. 
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