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Insight | Time: May 19 2020 10:47AM
Bullish and bearish factors on Chinese cotton market
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After May Day holiday (May 1-5), downstream product sales improve somewhat, and according to the conversation with our clients and spot cotton sales, downstream mindset indeed improves. Then, how about the status quo of the industry? What are the major influencing factors on cotton prices?

1. Industrial situation
Downstream product sales turn slightly better after May Day holiday, with slight improvement of domestic end-user demand, modest replenishment from traders and some small export orders. In view of spot cotton market, when ZCE cotton futures market only declined slightly on May 12-14, trading sentiment was obviously better than that in Apr. Most mills replenished feedstock after digestion during the holiday, and a few mills replenished half a month or one month more feedstock. In grey fabric market sector, some weaving plants with large orders intend to increase the cotton yarn inventory. Currently, the cotton yarn inventory in weaving plants remains low, and if grey fabric plants replenish more cotton yarn inventory, mills may intend to purchase more cotton later, then, the overall industrial chain will have a good cycle.

But this improvement needs the general improvement in grey fabric sector. Currently, the demand from end-user remains not large, and only a few weavers have large orders. Most weavers are still in face of tight capital and weak demand. If cotton yarn prices are hard to rise, mills still show low buying interests when ZCE Sep contract rises above 11,600yuan/mt.

2. Major influencing factors on cotton market and market views
The major influencing factors and market views are showed below, to state the bullish and bearish factors at present.
Major influencing factors Logic of bullish factors Logic of bearish factors
Sino-US relations The possibility to break the first phase trade agreement is limited, and China will be active to purchase agricultural products from the United States. Large uncertainties cover on the Sino-US trade relations, and trade conflict may return after the Covid-19 pandemic improves, then it may have impact on purchase from China.
Domestic sales 1. If the replenishment is large, cotton prices will push up. 2. Demand may come back in Jun-Aug, and the traditional slack season may be not dull. 1. Domestic sales are not stable, and the traditional slack season will come in Jun-Aug, so demand may turn weaker further, and consumption may be poor overall. 2. Currently, the downstream recovery is still limited. Under the impact of trade conflict and the pandemic, downstream plants still face tight capital and feedstock depreciation risks, and they are not able to increase the inventory.
Export sales The intensive export order cancellation period has passed, and export orders may return somewhat after the lift of lock-down in EU and US. Large apparel brands have applied for bankruptcy successively, and even there are export orders, the overall consumption recovery is limited worldwide.
New cotton supply in China Uncertainty on weather Extreme weather appears every year in Xinjiang, and growers will not make the cotton output reduce much.
Locust in India and Pakistan Locust may appear in Jun again, and the scale is larger. The locust influence has been paid attention earlier, and measures have been taken, so the influences may be limited.

3. Conclusion
Market mindset improves somewhat currently, and mills show buying interests when ZCE Sep cotton contract is at 11,500yuan/mt and below, but mills mainly purchase on need-to-basis at present. Under the anticipation of oversupplied situation on global new cotton market, the driving force of cotton prices is still restrained by downstream demand. Currently, the demand from end-user market remains limited, and the replenishment on feedstock is restricted by tight capital. Cotton prices are hard to go up.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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