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Insight | Time: Mar 16 2020 2:31PM
Cotton yarn decline being around the corner
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ZCE cotton futures plummeted and hit new low again and again amid the spread of pandemic in the world and slump of crude oil last week. By last Friday, May contracts decreased to 11,690yuan/mt at the lowest, and spot cotton price declined accordingly.

With the slide of raw materials and concerns about later demand upon the pandemic, transactions of cotton yarn weakened and downstream procurement reduced obviously. However, cotton yarn price has not moved down much despite lower cost and poor expectation to downstream demand, as the inventory was low and some varieties were short of supply. But this situation will hardly sustain and the decrease of cotton yarn price is around the corner.

At first, cotton price has decreased about 1,800yuan/mt compared with that in early this year, while cotton yarn price remained stable or even inched up. Currently the spot profit of cotton yarn mills reached 1,000yuan/mt or above. Even if considering the high-priced cotton bought before Spring Festival holiday, their average profit could reach about 500yuan/mt. Upon the weak market, the profit is likely to be compressed.

Secondly, cotton yarn inventory has started to increase. With the slack trading on the market, cotton yarn inventory has increased and the accumulation may accelerate later. In addition, the stocks of imported cotton yarn stayed high since Spring Festival holiday. By Mar 13, the stocks of imported cotton yarn were at about 213kt, compared with 84kt before Spring Festival holiday and 80kt in the same period last year. The over high stocks also weighed heavily on domestic cotton yarn.

At last, downstream demand. Since downstream weavers resumed work, they were mainly processing pre-holiday orders, and received scarce new orders. At present, their orders only can be scheduled to end-Mar. Besides, the epidemic developed fast outside China and it may not finish until Jun at the earliest by academician Zhong Nanshan, which will seriously hit textile and apparel market which takes up largely in export and reduce export orders sharply. As a result, the peak season originally seen in the first half year will hardly appear in 2020.

In conclusion, cotton yarn price stayed strong at present due to low inventory, but with sharp decrease of cotton price, increase of supply as more cotton yarn mills resumed work, a large amount of imported cotton yarn stocks, poor downstream demand, and reduced export orders affected by international pandemic, the market supply will turn excessive from tight, and then cotton yarn inventory will accumulate gradually. As a consequence, cotton yarn price will tick down, and the decrease may be large and come soon.
[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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