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Insight | Time: Mar 25 2020 10:29AM
Why ZCE May cotton contract dip below 10,000yuan/mt?
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The most actively traded May cotton contract dipped below 10,000yuan/mt on Zhengzhou Commodity Exchange in the afternoon of Mar 24, once to the lowest of 9,935yuan/mt, which was close to the historical low of 9,890yuan/mt and has declined by 4,515yuan/mt from 14,450yuan/mt appeared on Jan 14 before the Chinese Lunar New Year. Under the impact of COVID-19 pandemic, Zhengzhou cotton futures market has experienced steep losses. Though May cotton contract has dipped to a historical low level, the downstream buyers shall be cautious to purchase cotton.

1. Industrial situation
Recently, order cancellation has lured much attention. With the spread of novel coronavirus outside China, Europe and US starts to seal off the borders and shut down the apparel stores. Then, it was heard that China’ textile and apparel export orders were cancelled and textile plants were unwilling to take export orders on concern about the risks of cancellation later. Some textile manufacturers stated that it was just a beginning, and with the development of novel coronavirus worldwide, the new export orders would be less and less, and export orders might be worse in May-Jun. Under such an unfavorable situation in both domestic and external markets, Chinese cotton consumption is bound to see a large reduction.

In the previous report of How large is the pressure to consume the cotton in 2019/20?, China cotton consumption is forecast to reduce by 0.6-1 million tons. In recent two weeks, affected by the export orders, the domestic cotton consumption is expected to reduce by nearly 1 million tons soon. If the state cotton reserves do not prolong, the stock/consumption ratio is forecast to 55%, up 7% from previous season.

Global cotton consumption may also see large reduction with the on-going pandemic, and market confidence has not improved much after a series of measures of US Fed. Combined with the weak expectation and actual industrial performance, market players hold more pessimistic mindset, and the sharp downswing of ZCE cotton futures is not surprising.

2. Will downstream mills do bargain-hunting?
ZCE May cotton contract has dipped to historical lows indeed, and some market players have optimistic expectations of restorative rebound. However, the industry faces different situation in every periods and the historical lows may not the current level. Besides, the continuity of lows shall be considered. From the angle of the industry, the pandemic impact on textile and apparel demand is still going on, and it is early to say the influence ends. Mills shall purchase cotton based on own cash flow and orders, and shall not blindly be bargain hunter. Under the unfavorable market sentiment, to purchase cotton based on sales can control the risks well. Therefore, mills may keep cautious to purchase cotton currently.
[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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