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Insight | Time: May 21 2018 5:14PM
Possible influence path of hiking ZCE cotton futures on VSF market
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ZCE cotton futures saw rare limit-up on May 16 as Sep contract closed at 16,290yuan/mt, up 620yuan/mt from the previous day and Jan contract surged to 17,050yuan/mt.

Some analysts conclude that VSF is going to rebound amid simple logic of VSF to increase in line with cotton. However, even cotton spot has not been promptly pushed up.

On the whole, the rare hiking of cotton futures is really beneficial to VSF market, but whether it could change the accumulative weakness, when it will occur and how it will exert impact on spot market is worthy of discussion.

International economic and trade relationship full of twists and turns as well as worries over inflation pull the focus back to the industry. Let us review the impact of cotton futures change on supply-demand relationship of the industry chain.

Soaring cotton futures obviously brings arbitrage opportunities. Physical cotton can be registered as warehouse receipts and going short in futures market will gain higher profit versus spot market, which may cause reducing supply in cotton spot market. The data can be confirmed by change of warehouse receipt registration afterwards.

The impact on VSF market is market sentiment at first. Given weakening bearish expectation or even emergence of bullish expectation, VSF plants' tolerance of inventory and low sales ratio has improved. Some plants are no longer active in selling massive fibers in advance and they are likely to control single-day orders in extreme case, leading to substantial supply reduction periodically. Coupled with industry action before and the coming viscose industry forum, VSF plants are expected to keep firm attitude till this weekend in case of no further changes of cotton futures market.

Demand is reviewed from two aspects: speculative and using demand
The latter is likely to be obtained from the following three aspects:
1. Arbitrage is available for high-quality cotton, so some traders or even spinners by keeping necessary consumption may reduce high-quality cotton usage and use more low-grade cotton or chemical fibers. Thus, using demand may increase somehow, but the increment is expected to be rather limited.

2. Buyers in medium-to-downstream sector of rayon industry chain on worries over risks of rising prices may purchase rayon yarn in advance. Rayon yarn mills will procure more fibers to meet the requirement of those orders, but according to current situation, the increment of this part is not outstanding.

3. Suring cotton futures boosts rising cotton products and rayon products gain more orders by virtue of higher performance price ratio. The quantity will be considerable if such condition emerges. However, orders from end-user market refer to consignation, design, proofing, confirmation and delivery of fabric, which are hard to increase fast in the short run. Moreover, orders from end-users are fewer in current slack season of textile industry. Even if the condition evolves as expected, the demand may intensively emerge after one month.

Therefore, the biggest increment depends on speculative demand.
Now VSF has room for further decline, but it already lingers at lower range and cotton-VSF price spread is high, so part of speculative demand may increase intensively in the short run and such demand may be released multiply triggered by some factors. Participants should stay alert that although speculative demand may cause herd effect and may witness rolling increase in the short term, it is essentially pulling forward demand. If there is no reason of further increase or no significant growth of using demand later, demand vacuum is likely to emerge after speculative demand is released intensively. If cotton futures is volatile during the period, market players who speculated before may even suffer losses.

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