In mid-June 2022, the Zheng Cotton 2209 contract fell below 20,000 yuan/ton, and the domestic cotton spinning industry chain was in trouble. Because the drought in Texas has not been completely alleviated, the bottom support for foreign cotton is relatively strong, showing a pattern of strong externally and weak internally.
The current problem facing the domestic cotton market is that upstream costs are high, but downstream orders are weak and unable to bear the high costs, resulting in a serious lag in sales progress, and ginners have become the focus of the cotton spinning dilemma. At present, the cost of ginners is generally 22,500-25,000 yuan/ton, and even for ginneries that receive seed cotton at a high price, the cost may reach 28,000 yuan/ton. On the one hand, there is no suitable hedging opportunity in the futures market. From the 2201 contract to the 2205 contract, they all fluctuate around 21,500 yuan/ton. The 2209 contract was driven by external market demand after May Day and surged to 22,000 yuan/ton. However, The residence time is short, and a large number of hedging orders will intervene above 22,000 yuan/ton, suppressing the market. On the whole, even if the ginning factory can intervene in hedging at more than 22,000 yuan/ton, it will still bear a certain loss. In terms of spot sales, the current spot price of cotton is 21,000-21,500 yuan/ton, and direct sales of spot products also bear large losses. Moreover, due to factors such as the epidemic and US sanctions on Xinjiang cotton, downstream acceptance of cotton prices is also relatively low. The cumulative domestic sales of lint cotton are 2.877 million tons, and the sales progress is only 49.6%, which is far lower than the level of previous years.
Weak downstream consumption has been significantly affected by the epidemic. On the one hand, due to the seriousness of the epidemic, factories were required to stop production and workers were quarantined at home, resulting in a decrease in production load; on the other hand, the epidemic hindered express communications, making it impossible for downstream orders to proceed as usual, resulting in a loss of orders and reducing the startup load. According to the data, the downstream start-up load continued to be sluggish from April to May, dropping from 55% after the Spring Festival to around 45%. It was not until late May that a marginal improvement began, but the improvement was limited. As of June 2, the startup load of cotton yarn mills was 46%; the startup load of cotton fabrics was 46.7%, and the startup rates of cotton yarn and cotton cloth were the same.
Since the outbreak of the epidemic in Shanghai, yarn mills and weaving mills have continued to be in a state of low raw material inventory and high finished product inventory. Although the downstream raw material inventory is at a low level, due to high cotton prices and poor downstream orders, raw materials can only be used as needed. , to maintain minimum production and operation requirements. It was not until mid-to-early May that the market orders for pure cotton gray fabrics improved. Spinners and weaving mills showed signs of improvement in their inventory margins. The demand for raw material replenishment increased and finished product inventories decreased. However, there was another shortage of orders in the second half of the year, and overall orders were scarce. As of June 3, the inventory of raw materials in spinning mills was 21.6 days, and the inventory of finished products was 37 days. The inventory of raw materials fell and the inventory of finished products increased. The inventory of cotton yarn in weaving factories was 7.5 days, and the inventory of finished cotton gray fabrics in weaving factories was 39.7 days. Similarly, the inventory of raw materials fell slightly, and the inventory of finished products increased. The downstream recovery was less than expected.
Although Shanghai has gradually begun to resume work and production, there has been no large-volume ordering, and rigid demand replenishment is still maintained. The market’s overall enthusiasm for inquiry and order placement is sluggish. Home textile orders recovered to a moderate level again in early May after a small recovery. In the short term, June will be the off-season for the industry, and the probability of recovery of orders is expected to be limited. In the short term, it is expected that weaving mills will continue to reduce production and suspend production, and the operating rate will remain sluggish. In terms of price, it is expected that the price of cotton gray fabrics will remain stable and weak in June, and the inventory of weaving mills will also maintain accumulation.
The continued downturn in downstream orders, in addition to the impact of the domestic epidemic, is also closely related to the U.S. sanctions on my country’s Xinjiang cotton. Traceability issues continue to exist in export orders, and EU countries even use isotope tracking methods to test my country’s Xinjiang cotton. Such sanctions directly prevent downstream export orders from purchasing Xinjiang cotton for production. Even under the background of inverted domestic and foreign cotton prices, foreign cotton can only be used. Constraints in this area can only be improved by seeking to restore the international environment.
For the domestic and foreign cotton markets, in addition to the fundamental problems of the industrial chain itself, macro pressures are also gradually highlighted. The Federal Reserve’s balance sheet reduction test has begun, which has increased risk aversion in the international cotton market. The Fed’s current interest rate level of 0.75-1% is far from the neutral interest rate of 2%. The balance sheet reduction process that started on June 1 has just begun, and the impact of macro pressure on the market is relatively obvious. After entering June, cotton terminal consumption is likely to slow down. The U.S. consumer confidence index fell back to 106.4 in May, the lowest level in the past three months. We need to wait for the arrival of the peak season from September to October to drive downstream recovery.
Overall, in the United States, the dry weather has temporarily eased, but the high temperature weather is still there, and we need to continue to pay attention to the follow-up planting progress. The support below is relatively strong at present, maintaining a shock around 120 cents/pound. In India, cotton production is expected to increase in 2022/23, and the pressure on textile mills from high-priced cotton is expected to be relieved by then. Domestically, due to weak downstream demand, textile mills are unable to afford high-priced cotton. As a result, high-cost lint from ginners cannot be transferred downstream, making ginners the core of the dilemma in the cotton spinning industry chain. How will it be solved in the future and how will the market trend be interpreted? , still need to wait for the boots to hit the ground in late June. It is expected that the enthusiasm of ginners to harvest seed cotton will subside significantly from September to October 2022.
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