Since 2022, my country’s cotton market has been in a downturn, cotton consumption has continued to be sluggish, and prices have continued to fall. In the last round of commodity decline driven by the Federal Reserve’s interest rate hike, Zheng Cotton’s main 01 contract not only fell sharply, but also fell sharply. It fell from more than 20,000 to around 14,000 before it began to stabilize and consolidate. Until this Monday (August 15th), a big positive line appeared on the cotton market, like an arrow piercing the clouds. Within three trading days from August 15th to August 17th, the main contract of Zheng cotton rose by a total of 755 yuan/ton. , an increase of 5%, arousing widespread concern in the market. I wonder whether this rebound trend can continue?
The cotton market is full of contradictions
Zheng Cotton fell nearly 5% after rising for three consecutive days
Due to weather reasons this year, there are still a lot of resources for old cotton in the hands of ginners. However, the growth process of new cotton is going smoothly, and some areas have even bloomed. The time for new cotton to be put on the market may be significantly advanced. Domestic cotton has changed from the trend of tight supply, and there has been a situation of oversupply.
Under such a background, life for textile companies is even more difficult. Cotton prices have dropped significantly, but there has been no significant improvement in the profits of textile companies. Because the sharp reduction in demand makes it more difficult for companies to survive.
Under internal and external difficulties, the price of cotton futures temporarily gave people no hope. But last Friday, the U.S. Department of Agriculture’s August supply and demand report sharply lowered U.S. cotton production by 640,000 tons to 2.74 million tons, a decrease of 19%. As soon as the news came out, ICE US cotton reached a strong daily limit on Monday, and Zheng cotton followed suit. The main contract once again returned to above 15,000 yuan/ton.
Recent market trends of Zheng cotton
With the sharp rise for several consecutive trading days, the speculation of US cotton production reduction may have been digested by the market. The external market rally has gradually stopped. There are insufficient supporting factors for Zheng cotton to continue to rise. In the night trading on August 17, the January contract of Zheng cotton increased its position downward, and the heavy Back to supply and demand logic. On August 18, domestic futures closed broadly down. The closing price of Zheng Cotton’s main contract was 14,835 yuan/ton, down 755 yuan, almost erasing all the gains in the previous three trading days.
Due to slow sales progress, the carryover inventory this year is high, and the supply in the new year has increased significantly year-on-year. Although demand has entered a periodic peak season, the improvement in downstream performance is not large and the boost is limited.
At present, the fundamentals of domestic cotton are still relatively bearish, and the supply of cotton is sufficient. However, the demand-side market is still very poor even after the epidemic prevention and control is relaxed and the price difference between domestic and foreign cotton is inverted. Product inventory is high, and the startup rate of textile mills is relatively low. Low, the Xinjiang cotton problem has an obvious impact on demand, and domestic cotton is weak in the long term.
For the domestic market, the short-term concomitant rebound of Zheng cotton driven by market sentiment and funds is a very common trend. But with persistence and height, I take a cautious view. Mainly because under the Xinjiang cotton ban and the existing cotton import quota system, domestic and foreign industrial supply and demand and the macro environment are actually out of sync, especially as Sino-US relations become increasingly tense and economic and trade frictions intensify, the performance will more obvious. In this round of rebound in cotton trends, there have been no fundamental changes at the domestic industry level. The contradiction between supply and demand may be further intensified with the arrival of a bumper harvest in the new year and the continued implementation of the Xinjiang cotton ban.
Domestic cotton supply exceeds demand
Why import large amounts of foreign cotton?
Even though domestic cotton supply exceeds demand, we are still importing cotton in large quantities. Why is this?
Figure 1 China’s cotton import situation in 2021-2022
Source: Mysteel Agricultural Products Network
Since June, the cotton market has been weak, and the Xinjiang-related bill that officially came into effect on June 21 has put a certain amount of pressure on the industry. As the world’s second largest cotton producer, my country’s annual cotton consumption is stable at 7.5-8.5 million tons, accounting for about one-third of the world’s total cotton consumption. Our country needs to import approximately 2 million tons of cotton every year.
Data show that my country’s cotton planting belt is roughly distributed between 18 degrees and 46 degrees north latitude and 76 degrees and 124 degrees east longitude. There are 22 cotton-producing provinces and cities, including cotton fields in four provinces: Sichuan, Hunan, Shanxi, and Jiangxi. The area is more than 100,000 hectares.
But even so, the cotton we produce is still not enough for our use. According to reality, we need to import about 2 million tons of cotton every year to meet the needs of domestic production activities.
Taking the use of cotton in 2020 as an example, my country’s total cotton demand in 2020 will be about 7.8 million tons, and the output will be about 5.95 million tons. The final amount of cotton that needs to be imported is 185 tons.
Ministry of Commerce: The United States abuses export control measures
Threaten the security and stability of global industrial and supply chains
Recently, Sino-US relations have become tense again due to the Taiwan Strait issue. On August 18, according to China Business News, Ministry of Commerce spokesperson Shu Jueting said that we have noticed that the United States announced the launch of the so-called “U.S.-Taiwan 21st Century Trade Initiative” negotiations and announced the so-called “negotiation authorization.” China firmly opposes this. The United States should abide by the “One China” principle and the provisions of the “Three Sino-US Joint Communiqués”,We must earnestly implement the commitment made by U.S. leaders not to support “Taiwan independence”, prudently handle economic and trade relations with Taiwan, and fully respect China’s core interests. This is related to the overall situation of Sino-US relations, Sino-US economic and trade relations, and to world peace, stability and prosperity. China will take all necessary measures to resolutely safeguard sovereignty, security and development interests.
The U.S. Department of Commerce recently announced that it will implement export controls on four technologies including EDA software tools. In response, Ministry of Commerce spokesperson Shu Jueting responded today that China has noted the relevant announcement issued by the United States. The United States continues to generalize the concept of national security and abuses export control measures. The relevant practices deviate from the principle of fair competition and violate international economic and trade rules. They will inevitably hinder international scientific and technological exchanges and economic and trade cooperation, and threaten the security and stability of global industrial and supply chains.
For the domestic cotton textile industry, the impact of the Xinjiang cotton ban on the industry is still expanding, and it is difficult to have effective countermeasures in the short term. The traditional peak season of the textile industry is approaching, and cotton demand is gradually recovering. The domestic cotton market may continue to be in a situation where domestic supply exceeds demand, cotton prices fall, and a large amount of high-priced foreign cotton is required to be imported.
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