Since the beginning of May, cotton prices have been falling, and the decline has accelerated recently. On Wednesday, the 2209 contract, the main domestic cotton futures contract, hit its lowest level of 14,790 yuan/ton, a new low in more than a year. As of the close, the main cotton futures contract 2209 fell by nearly 7%, and the main cotton yarn futures contract 2209 fell by 4.87%.
Cui Jiayue, consultant of Green Dahua Futures Research and Investment Consulting Department, believes that the recent sharp decline in cotton prices is mainly due to three reasons: First, domestic downstream demand is weak. In the first half of the year, the epidemic affected the textile industry. Downstream textile companies had insufficient orders and reduced operating rates. Combined with the impact of the off-season consumption, demand for raw materials was weak and lint sales were slow. The second is the impact of new domestic cotton coming on the market. New cotton is about to be launched, and cotton processing companies are opening up acquisitions in accordance with policy requirements, which means that the demand for old cotton is becoming increasingly urgent and the pressure on cotton sales is increasing. The third is pressure from external markets. Amid high global and U.S. inflation, the Federal Reserve has stepped up its tightening monetary policy. In anticipation of another interest rate hike at next week’s Federal Reserve interest rate meeting, the U.S. dollar index hit a 20-year high, putting greater pressure on the global commodity market.
Industry insiders said that from a fundamental perspective, market demand in Europe and the United States has peaked and is falling, while domestic demand will not fully recover in the future. Coupled with global production growth expectations in the new year, there will be greater downward pressure on cotton prices. “Under the influence of internal and external factors, cotton prices have continued to decline.”
Wang Xiaobei, a cotton researcher at Hongye Futures, said that in mid-May, rainfall in the Texas area of the United States kicked off this round of cotton decline. “The rainfall in Texas seems to be a signal for cotton to fall. After the signal was triggered, cotton prices fell out of control. Zheng Cotton finally returned to its fundamentals.” Wang Xiaobei said that judging from the start-up situation of domestic yarn mills and cloth mills, in mid-to-late March , the downstream industry began to enter a weak state, with both operating rates declining and finished product inventories rising. The domestic local epidemic made this phenomenon more obvious. Due to the lack of orders from the downstream, cotton companies have low purchasing willingness, industrial inventories remain low, domestic lint sales are progressing slowly, and sales pressure has shifted. In the case of textile enterprises losing profits in processing and goods being shipped unsmoothly, the operating rate has declined more and more year-on-year. Coupled with the impact of factors such as the epidemic and relatively weak macroeconomic expectations, cotton prices have plummeted, and the main contract has fallen by more than 100% since mid-May. 6500 yuan/ton.
The above-mentioned industry insiders said that the current domestic cotton spot price has dropped to 17,400 yuan/ton, which is significantly lower than the cost price of cotton listed last year, which was 6,000 yuan/ton. The 2301 contract price corresponding to new cotton is currently only 14,600 yuan/ton, which is already lower than this year’s new cotton planting cost. The cotton surplus in Xinjiang will exceed 1 million tons in 2021/2022, and it is expected that the surplus will also exceed 1 million tons in 2022/2023.
Later last Friday, the long-awaited cotton reserve policy was implemented. However, Wang Xiaobei said that the purchase and storage volume of 300,000-500,000 tons was lower than market expectations. Compared with the large amount of unsold domestic lint cotton, the total volume of purchase and storage was small, and the profit was not as good as expected. The pressure on cotton sales by ginners was once again ignited. “Until the sales pressure on lint cotton is significantly relieved, it is difficult to be optimistic about cotton prices.”
In addition, Wang Xiaobei also said that downstream consumption is also one of the main factors affecting cotton prices. From January to April this year, the total volume of textiles and clothing imported by the United States and the European Union from various countries around the world was at a high level in recent years, but China’s market share dropped significantly and was replaced by the ASEAN region.
“From a global perspective, the supply of cotton in the new year is looser than this year, but there are also major variables in the future. It is currently the cotton growing season in the northern hemisphere, and the impact of weather on output needs to be paid close attention to.” Wang Xiaobei said.
Although the aforementioned industry insiders are not optimistic about the market outlook, they believe that the current state reserve rotation will gradually alleviate the oversupply situation in the cotton market, and cotton prices are expected to gradually establish a bottom area, but the reversal will take more time to digest.
Cui Jiayue believes that cotton futures prices have fallen significantly in the short term, and the possibility of a rebound cannot be ruled out. As for whether the decline can be stabilized, it depends on the start-up of demand in the later period. On the other hand, aside from the cost, the commodity itself still has value. Yes, extreme declines that deviate too much from the value of commodities will be corrected by the market. Cotton prices will oscillate weakly in the market outlook, and the overall oscillation range is likely to move down to 14,000-16,000 yuan/ton.
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