There are currently two main negative drivers for cotton: textile profit repair and new cotton pricing. In a falling market, various negative factors are relatively clear, so I won’t go into details here. This article focuses on scenarios and signals that could lead to a rebound. Analyze the possible increases from the three aspects of conventional production, sales, and policies.
The first is consumption. Looking back at September and October 2020, it took textile companies 1.5 months to clear inventory from high to low. Is this possible this year? The common point is that spinning and weaving enterprises have low inventory of raw materials and high inventory of finished products. Textile enterprises are losing money, weaving factories are making small profits, and the operating rate is low. The difference is that inventories in the weaving and clothing industries, as well as textile and clothing inventories in Europe and the United States, will be low year-on-year in 2020, but will be high year-on-year in 2022. In addition, macroeconomic expectations are that at the end of 2020, the world, including China, will adopt policies to stimulate economic recovery, and in 2022, the world will adopt tightening policies except for China and Russia. In other words, there will be replenishment and consumption recovery expectations in 2020, while the industrial chain inventory structure and terminal consumption expectations are still in the negative feedback stage in 2022. Even if China’s terminal consumption improves month-on-month, high terminal inventory will also extend the destocking time. Therefore, if consumption improves, the industrial chain will take a longer time to destock, which will not be immediately fed back to cotton. It is a slow variable. When the inventory reaches a neutral position, the decline in cotton can be stopped. If the textile industry is profitable and the textile production capacity originally scheduled to be put into operation will still be put into operation, cotton will have a chance to rebound.
Second is output. The two usual factors are area and weather. From 2022 to now, the key variable of sown area is India. India is a mysterious country and cannot be speculated. Indian officials said it will increase by 15-25%. The US USDA estimates that it will increase by 8.6% month-on-month. The monsoon will arrive inland normally in June, followed by 0.5-1 months. Month is the critical landing period. 2022 is the second consecutive La Niña year. The expectation of high temperatures in the northern hemisphere has been explicitly traded, mainly reflected in the US cotton weather, so the positive margin of the US weather has weakened. In China, high accumulated temperatures have made Xinjiang prosperous, but high temperatures exceeding 35 degrees Celsius began to appear at the end of June. The key is that during the flowering period from the end of June to July, if high temperatures persist and the water supply cannot keep up, it will cause Flowers fall due to heat damage, and the expectation of “booming production” changes to the expectation of “reduced production”. However, the medium-term forecast indicates that the temperature in the northern hemisphere will drop year-on-year in the second half of the year, so the temperature in Xinjiang in July is confusing and requires great attention. India’s weather forecast remains unchanged from the medium term, with no signal yet. Australia has abundant rainwater reservoirs, and sowing in 2023 will also be a good year for production. To sum up, the sown area has basically been implemented, and attention will be paid to whether India provides profit margins. Pay attention to the weather in Xinjiang in July. If there is heat damage, it will be a support signal. A price rebound will require a hype that is matched by reality.
Finally, there is the banking policy, which is related to how to solve the dilemma of cotton ginning mills. At present, the market is more concerned about whether loan repayment is compulsory. If it can be allowed to be carried forward across the years, the market acquisition entities can fully support the Zheng Cotton 09 contract, suppress the 01 contract, and create new cotton acquisition advantages with the advantage of scale. In particular, the current large-scale bad debts of small and medium-sized ginning plants will reduce the effective processing capacity in the new year. Therefore, as long as liquidation is not forced and Xinjiang is not affected by disaster, Zheng Mian’s 9-1 set can make up for some losses. If the above three factors resonate at a certain time, it can rise; if two factors are met, a small rebound can occur.
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