Since Apr, ZCE cotton futures market fluctuates upward all the way under the expectations of lower 2023/24 cotton production, harvest-rush of seed cotton in the second half year and the unfavorable weather condition in Xinjiang. Recently, Xinjiang ushers the second wave of rainfall, which is larger than the first time. Some regions suffer heavy wind and sandstorms, which may affect the sprout of cotton crops. The concerns over the weather condition are bullish for ZCE cotton, pulling up the futures market. ZCE overnight cotton futures continue to rise last Friday, with the major cotton contract, Sep contract, once up to 16,250yuan/mt, reaching a new high within the year.
Bleak spot cotton sales
Recently, ZCE cotton futures market remains firm, but sales are bleak. Currently, offers of cotton under fixed level are high. Xinjiang machine-picked grade-3128 cotton prices have been offered at 16,300yuan/mt and above, ex-Xinjiang. For basis trades, market offers are mixed. The mainstream basis of machine-picked grade-3128 cotton is at 300-400yuan/mt on ZCE Sep contract, ex-Xinjiang, but some traders adjust up the basis to 500yuan/mt and above. During May 9 and May 12, when ZCE cotton futures declined to below 15,700yuan/mt, sales were moderate, while recently, ZCE cotton futures go firmer again, and trading sentiment weakens gradually. The continued high of ZCE cotton futures triggers the worries from traders about the sales. Spot cotton sales also follow up, but downstream spinners are not willing to chase up, and could not accept the high level well, only purchasing for pressing demand.
Spinners see less orders with coming traditional slack season
Cotton yarn market went thinner after Tomb-Sweeping Festival, and was basically into slack season after May Day holiday. Though the market weakened earlier, it was in line with the traditional period. Currently, downstream orders have reduced apparently. New orders were limited and volumes were mainly small. According to CCFGroup, operating rate of some fabric mills in Guangdong has dropped to 30-40%. Though most players hold bullish anticipation in long run, they hold not positive anticipation in medium to short run, considering that the speculation on weather condition will not continue for long time. If sales keep bleak after the withdrawal of capital, cotton prices are likely to decline, so buyers remain cautious to purchase cotton. Though cotton demand is less compared with previous period, cotton yarn inventory is still at a low level, and operating rate of spinning mills maintains high, supportive to cotton prices.
In general, with no volatility in cotton industrial chain, any changes in supply side can influence cotton prices. In short, whether this wave of influences from weather on cotton futures will sustain is uncertain. Downstream demand is weakening, and cotton yarn and grey fabric prices move lower. The cotton fundamentals are not substantially positive currently. Therefore, in short, cotton prices may fluctuate widely, and in medium to long run, cotton prices still have upward momentum under the expectations of lower production.
