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Insight | Time: Nov 12 2020 2:01PM
Cotton market: new cotton costs supported, but downstream buying weakens
 
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After the uncertainty caused by the US election, cotton prices return to be range-bound, and the machine-picked seed cotton procurement in South Xinjiang is also coming to an end. The costs of new cotton for 2020/21 have basically been determined. The costs of new cotton and the current state of the industry have been sorted out.

1. The costs of new cotton are supported
Currently, the procurement of machine-picked seed cotton in South Xinjiang has come to an end, and the costs of new cotton in 2020/21 are basically confirmed (due to the further increase in the proportion of machine-picked cotton, this article only discusses the costs of machine-picked cotton). On the whole, although the purchase price of machine-picked cotton in South Xinjiang has gradually dropped after October 19, and the costs of new cotton declined to around 14,500-14,700yuan/mt recently, but from a comprehensive point of view throughout the year, the 2020/21 machine-picked cotton costs are mostly around 15,000-15,300yuan/mt in South Xinjiang, and the most cotton costs in North Xinjiang are in the range of 13,800-14,200yuan/mt, some higher to nearly 15,000yuan/mt. Due to the high costs of new cotton, some ginners with low costs recently sell grade-3128 cotton at 14,600-14,800yuan/mt, but they are not willing to cut prices further, while ginners with higher costs tend to stand on the sidelines and do not offer.



In addition, due to high new cotton costs, for new cotton at fixed prices, trading prices are higher than the selling prices of on-call cotton to traders, so the registered warehouse receipts of new cotton are far below the corresponding period of last year. As of Nov 11, the registered warehouse receipts for old cotton were about 66% lower than the same period of last year, and the registered warehouse receipts for new cotton were about 51% lower than the same period of last year. Though supply of on-call cotton increases somewhat recently, the most 2020/21 cotton is sold under fixed prices overall, and the selling progress in Xinjiang is slower than last year. Most ginners state that they are inclined to stand on the sidelines first and decide till late Dec. When ZCE cotton futures market surges to a high level previously, ginners have missed the chance to do hedging, so recently, ginners have strong intention to do hedging, at 14,700-14,800yuan/mt, while for higher cotton costs, some intend to do hedging at above 15,000yuan/mt.
Yearly change of warehouse receipts (Nov 11, 2020)
  Old cotton (registered) New cotton (registered) Forecast Total
2019/20 season (lot) 8481 3310 3030 14821
2020/21 season (lot) 2853 1614 1205 5672
2019/20 season (equivalent to tons) 35.62 13.9 12.73 62.25
2020/21 season (equivalent to tons) 11.98 6.78 5.06 23.82
yearly change (in ton) -66.40% -51.20% -60.20% -61.70%


2. Downstream buying weakens
Downstream cotton yarn sales slow down and new orders are limited, so spinning mills are not active to replenish feedstock, and trading volumes of cotton have declined much compared with the first half month of Oct. Part of spinners concerns about the consistency of remaining 2019/20 cotton, so turns to purchase new cotton, but new cotton sales remain thin currently. In general, cotton yarn sales slow down somewhat and new orders for spinning mills are scarce, but the product inventory is not high, and some mills still have orders at hand. The inventory pressure is not large at present, but the cotton buying weakens.


Conclusion: in North Xinjiang, the most new cotton costs are at 13,800-14,200yuan/mt, and in South Xinjiang, the cotton costs are about 15,000yuan/mt or slightly above, so the cotton market still has strong support from new cotton costs. Downstream market slows down somewhat, and the buying interests for cotton also weakens, but product inventory is still not high, taking time to accumulate. When ZCE cotton futures market surges to a high level previously, ginners have missed the chance to do hedging, so recently, ginners have strong intention to do hedging, at 14,700-14,800yuan/mt, while for higher cotton costs, some intend to do hedging at above 15,000yuan/mt. Therefore, if ZCE cotton futures keep upward, it may face larger hedging pressure.
[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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