This week, the mantra in futures circles is “Are you short?”
For the bears, this is a profitable week; for the bulls, it is the most devastating week.
Just on Friday, domestic and foreign cotton prices resonated, and the market sentiment was pessimistic. The main force of Zheng Cotton was close to the lower limit in the morning, and the far-month contract hit the lower limit. As of the afternoon closing, cotton fell by more than 6%. The daily lines of cotton and cotton yarn futures both showed an accelerating downward trend.
International cotton prices plummet
What is the reason for the sharp drop in cotton prices at home and abroad?
Galaxy Futures cotton analyst Liu Qiannan told the Futures Daily reporter that on the one hand, there is the impact of the general decline in commodities caused by the accelerated pace of the Federal Reserve’s interest rate hikes, and on the other hand, there is also the impact of cotton’s own fundamentals. Cotton demand has begun to deteriorate in the fourth quarter of 2021, and has not improved in the small peak season after the Spring Festival. Afterwards, the domestic epidemic in April and May can be said to have worsened the situation for cotton consumption. During this period, foreign cotton prices have been relatively strong, especially for U.S. cotton and The price of Indian cotton has hit new highs repeatedly, driving the price of Zheng cotton to become more volatile. However, since mid-to-late May, the bullish factors supporting the rise of U.S. cotton have begun to weaken. The drought situation in the main producing area of Texas has been greatly alleviated. The volume of U.S. cotton sales contracts without pricing in July has also dropped significantly. Cotton production has also been significantly reduced in one step, and there is basically no room for downward adjustment. The above factors have caused the factors that previously supported the strength of U.S. cotton to begin to weaken. As the Federal Reserve accelerates its interest rate hikes and commodities weaken, U.S. cotton prices also begin to fall. Without the support of the external market, Zheng cotton returns to weak domestic demand. fundamentals.
“From an annual perspective, global cotton production in 2022/2023 is expected to increase and demand decrease, supply and demand will be looser than the previous year, and high-priced cotton has downward driving force; from a marginal demand perspective, US apparel demand shows signs of peaking, and Southeast Asia Textile and clothing exports fell significantly month-on-month in May, and the compression of spinning profits caused the operating rate of foreign textile companies to decline, which also put pressure on cotton prices.” said Wu Jingwen, cotton analyst at CITIC Futures.
It is worth noting that the number of speculative net long orders in ICE cotton futures decreased for the sixth consecutive week.
Wu Jingwen believes that international cotton prices have previously been driven up due to “short squeeze”, with the main contract rising from 120 cents/pound to a maximum of 155 cents/pound. As the early bullish news was digested, the macro turned bearish, demand growth was weak, and high prices were suppressed by downstream consumption. ICE’s net long position in cotton futures continued to fall, and high-priced cotton faced strong downward pressure.
Weak supply and demand drag down cotton prices
The reporter learned from interviewees that the current domestic upstream inventory is high, downstream demand is poor, loan repayment time is approaching, and the ability to raise prices is weak. Zheng cotton is under pressure, and internal and external resonance has intensified the decline of Zheng cotton. At present, there is a negative feedback superposition of weak macro expected sentiment and weak real industry sentiment.
What is the domestic cotton supply and demand situation? Liu Qiannan told reporters that the current domestic cotton supply is relatively sufficient. Data from the China Cotton Information Network shows that the national cotton commercial inventory at the end of May was 4.1628 million tons, an increase of 584,900 tons year-on-year. According to data from the National Cotton Monitoring System, as of June 16, the country’s cumulative cotton sales of lint were 3.563 million tons, a decrease of 1.54 million tons from the average of the past four years, and the sales rate was 61.4%. In addition, cotton imports are also relatively large, and overall cotton supply is relatively sufficient. On the demand side, the current domestic performance is still weak, with high gauze inventories, poor terminal demand and export volume, and the current overall market consumer desire is poor, and it is difficult to see a significant improvement in consumption in the short term. However, with the sharp drop in cotton prices, the price of cotton yarn raw materials has dropped significantly, and the spinning profits of enterprises have improved. If this situation can continue, it will be good for textile enterprises, and future consumption can also be expected. However, there are currently large pessimistic expectations in the export market. When the pessimistic expectations turn into reality in the future, it will have a very large impact on cotton consumption. This is a consumer-side risk that is currently uncertain.
“In the overall downward macro environment, cost support has failed, cotton prices will fall until actual demand emerges, and the entire industry lacks lubrication from traders. The contradiction lies in the high costs of ginning plants and weak downstream demand.” Wu Jingwen said.
“It is difficult to drive the recovery of consumption with lower cotton prices, and the road to destocking cotton is long.” Wu Xinyang, senior researcher of soft commodities at CITIC Futures, told reporters that due to the processing nature of the textile industry itself, the bargaining power of the upstream and downstream is weak, and more reference is needed for downstream pricing. Regarding the trend of cotton prices, the decline in cotton prices has actually led to a cooling of the textile market and continued to worsen the continued accumulation of yarn and gray fabric inventories. As the mentality of the textile industry has not improved, the strategy of purchasing raw materials is still maintained. Commercial inventories in May fell by 499,000 tons month-on-month, which was lower than the 554,200 tons in the same period last year. The inventory level increased by 584,900 tons compared with the same period last year. Although the recent decline in futures prices and the increase in point-price transactions have accelerated the sales of lint cotton in ginneries, this does not mean that cotton inventories have been eliminated. The amount purchased and consumed by textile enterprises is relatively limited, while traders have expanded their commitment and become actual buyers in the market in the near future. Therefore, the supply pressure is still extending backward, and the fact that supply is abundantNo change.
The reporter found that the previous trading logic of investors was based on weak domestic demand (including sluggish demand and poor logistics caused by the epidemic) and strong cost support under a macro neutral-to-bearish environment (the general environment of a slight U.S. interest rate hike). The market reached a weak balance during this period due to the contradictions (the spot price of cotton gins was high, the drought in the United States and the shortage of US cotton at that time).
In fact, the current logic is that from a macro perspective, the pace of interest rate hikes by the Federal Reserve has changed dramatically due to the acceleration of inflation. The original moderate interest rate hike expectations have been broken. Rapid interest rate hikes have intensified the suppression of demand and caused panic in the market. The entire trading atmosphere changes due to macroeconomic changes.
“The current trading logic has become that the domestic demand recovery after the epidemic has been falsified, the export of Xinjiang products is restricted, the interest rate hike has further suppressed global demand, and the contradiction between weak demand and the cost support of strong ginning plants. In the general environment In the context of huge changes, cost support has been unable to withstand the concentrated outbreak of negative factors, eventually forming a negative feedback. Currently, commodities including cotton have entered the stage of eliminating financial valuations, and the appreciation of the US dollar has further reduced the valuation of US dollar-priced products. , until actual demand arises.” Wu Jingwen said.
Policy factors are still the focus of market outlook
Wu Xinyang told reporters that from the stop of storage sales in November last year to the failure of rumors of purchase and storage in June this year, the two operations of China Reserve Cotton had a major impact on the market. The state cotton reserve still plays a ballast role in the domestic cotton market. Although the state reserve cotton inventory level has clearly bottomed out, the state reserve cotton still takes the initiative in the market.
“From a large cycle perspective, the State Reserve Cotton has entered a net purchase and storage cycle. From 2014 to 2021, the China Reserve Cotton Net Reserve Reserve reached 11.72 million tons, which has exceeded the net purchase and reserve volume of the previous cycle. In order to ensure the supply of domestic cotton With the intensity of market regulation, in the medium to long term, the number of purchases and reserves will be far greater than the number of reserves sold,” Wu Xinyang said.
In Wu Xinyang’s view, under the background of strong internal and external weakness and rising price differences in the early period, the State Reserve Cotton has carried out a series of actions to purchase and store foreign cotton, but the price is unknown. In the current industry cycle where global textile and apparel consumption has peaked and declined, the domestic cotton spinning industry chain has been hit by the ban on Xinjiang cotton. The state reserve control measures may be used in the short and medium term to support the industry chain. On the one hand, in order to protect cotton farmers’ planting profits and stabilize seed cotton prices, the market support method can be adopted to purchase and store lint cotton during the October purchase period, so as to stabilize cotton prices and the mentality of ginners. On the other hand, in order to protect downstream orders, the foreign cotton purchased and stored in the early period when the internal and external price differences were high can be sold to meet the textile industry’s demand for non-Xinjiang cotton. In addition, the State Reserve is at a low point in inventory, and the price difference between domestic and foreign prices is inverted. Xinjiang cotton is in turn, which can economically meet the demand for replenishment.
Regarding the market outlook, Wu Jingwen believes that after a rapid and sharp decline in the market, there is the possibility of an oversold rebound, but the fundamental demand is weak, the market’s expected support policy has not been seen, and there is a lack of factors for rebound and rise. It is expected that Zheng Mian will continue to search for the bottom. When emotions are digested, the market will stop falling and rebound. But overall, cotton prices are expected to maintain a weak trend in the third quarter due to deteriorating macroeconomic conditions and weak demand.
“Maintain the long-term view of the global cotton market being bearish. But for the domestic cotton market, the probability of State Reserve cotton regulation is increasing. Under the long-term bearish trend, the impact of State Reserve regulation on the market should not be ignored and needs to be grasped. Price rhythm.” Wu Xinyang said.
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