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Insight | Time: Jul 2 2020 10:47AM
2020 China state cotton auction begins, how about the impact?
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Before the Dragon Boat Festival (Jun 25-27), rumors have been in circulation that China would start cotton auction in July, and Zhengzhou cotton futures market began to move downward. On the night of Jun 30, the official news finally came out. The state cotton auction will start from July 1 and last to September 30, 2020, with the total quantity of about 0.50 million tons. In principle, the daily auction volumes are about 8,000 tons. Under the sufficient supply on the market, the 500kt of reserved cotton releasing to the market is not small, and the monthly auction volumes are about 30% of cotton consumption in Apr or May affected by the COVID-19 pandemic, moreover, the proportion is likely to climb up later with the slack season in the downstream market. Therefore, the selling volumes of reserved cotton still have pressure on spot market. However, after studying the calculation of selling prices, the adverse impact of cotton auction may weaken somewhat.

According to the announcement, the base selling price will continue to be related with international cotton prices. Formula is base selling price (cotton type 3128B)=average price of prior week's domestic cotton prices*50%+average price of prior week's international cotton price*50%.

Selling price of standard type cotton (3128B)
  CCIndex3128B CncottonB Cotlook A Cotlook A under 1% tariff
Weekly average 11,972 11,857 68.28 11,759
22-Jun 12,026 11,890 68.45 11,788
23-Jun 11,973 11,852 68.45 11,788
24-Jun 11,916 11,830 67.95 11,702
Base selling price 11,837

The base selling price during the first week from July 1-3 is 11,837yuan/mt, only 29yuan/mt lower than 11,866yuan/mt of CC Index 3128B on Jun 30. It can be seen that when the price spread between domestic and foreign cotton is large, price spread between spot cotton price index and base selling price of reserved cotton will be large, but when the price spread between domestic and foreign cotton is small, the corresponding price spread will narrow. Under such condition, the reserved cotton is less attractive on theory, and trading volumes may fail to reach 8,000 tons per day. In addition, when ZCE cotton futures market declines, mills may consider to purchase reserved cotton next week, while when ZCE cotton moves up, mills may show higher purchasing intention.

Nevertheless, CC Index 3128B is slightly lower than the actual purchase prices of spinners, and the index has certain price difference with the actual trading prices on the market. The state cotton auction can reduce certain cotton costs for mills using low-grade cotton. The price spread between CCFGroup 3128 Cotton Index on Jun 30 and the base selling price of reserved cotton reaches 323yuan/mt.

In addition, according to our calculation, the remaining reserved cotton inventory in state warehouses includes 790kt of 2011/12-2013/14 Xinjiang cotton, 950kt of 2011/12-2013/14 upcountry cotton. On July 1, the selling sources are all old cotton. Old cotton faces poor color index, and prices will be lower. Last year, transactions focus on Xinjiang cotton, with 28>length≥27mm, 28>strength≥26gpt, and upcountry cotton, with strength ≥28gpt, which can meet the low-count cotton yarn without requirement on color index. Therefore, this round of cotton auction is favorable for this kind of cotton users and puts certain pressure on low-grade cotton market.

In general, according to the calculation of base selling price of reserved cotton, when the price spread between domestic and international cotton is small, the price spread of spot cotton and base selling price of reserved cotton is small, so buyers may be not active to purchase reserved cotton, so the adverse impact of cotton auction weakens somewhat. But as the selling cotton is old cotton, with poor color index, it can meet the demand for mills that produce low-count cotton yarn. Therefore, this round of state cotton auction will have certain pressure on low-grade cotton market. Due to the higher supply of low-grade cotton, cotton prices may face some pressure in short.
[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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