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Insight | Time: Mar 26 2021 2:31PM
Xinjiang cotton issues arouse firestorm, ZCE cotton futures tumble
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On March 24, the H&M’s statement on Xinjiang arouses firestorm on the social media of China, and it accelerates the decline of Zhengzhou cotton futures, with the major contract dipping below 15,000yuan/mt, amid the depressed macro environment, continual stronger US dollar, another lock-down in Europe caused by COVID-19, and the unfavorable orders in traditional buoyant season. On March 25, Zhengzhou major cotton contract once reaches a low of 14,430yuan/mt during the night trading session under the development of Xinjiang issues. We will review the cause of ZCE cotton futures decline, Xinjiang cotton issues and fundamentals of cotton textile industry in the following.

1. Reasons for recent decline of ZCE cotton
Since early March, the overall macro capital market is under the depressed situation under the concerns over the inflation caused by the higher U.S. treasury yields, continual stronger US dollar and tightening liquidity in China. Turkey, Brazil and Russia raises the interest rates successively, and later, Bank of Canada set to slow its bond buying. Market concerns about the global monetary policy issues. Though the U.S. settles down the US$1.9 trillion package and there is news about $3 trillion and $4 trillion stimulus, the worries over the capital are hard to be removed. On the political level, the high-level talks between China and the United States were intense during March 18 and March 19. The European Union imposed sanctions on four Chinese officials on March 22 for human rights abuses in Xinjiang. In addition, Germany extended the lock-down until April 18, and fears on another wave of pandemic in Europe appeared. Under the shadow of macro environment, the orders anticipated by the market participants after the Chinese Lunar New Year are not come in traditional buoyant season, so worries over the high cotton yarn inventory at traders' hands cover on the market. The H&M's statement on Xinjiang accelerates the decline of cotton futures. The major cotton contract, May contract, dipped below 15,000yuan/mt quickly and the overnight contract once reached 14,430yuan/mt on March 25.

2. Xinjiang cotton issues development
The Xinjiang cotton issues have been repeatedly mentioned in the industry, but the H&M incident on March 24 makes the issue well-known to the public. This article sorts out the important timeline of Xinjiang cotton issues.
Timeline of Xinjiang cotton issues
Time Issues
May 24, 2020 Huafu Fashion Co., Ltd. announced that its wholly-owned subsidiary, Aksu Huafu Textiles Co., Ltd., was added to the Entity List by US Department of Commerce on May 22. 
Jul 1, 2020 On July 1, US government published Xinjiang Supply Chain Business Advisory, to caution businesses about the risks of supply chain links to entities in the Xinjiang Uyghur Autonomous Region (Xinjiang) and elsewhere in China.
Jul 21, 2020 Changji Esquel Textile was put on the on the Entity List by so-called forced labor.
Sep 8, 2020 According to Reuters, U.S. would ban imports of cotton and tomato from Xinjiang, China.
Sep 15, 2020 The U.S. government shelved the ban on Xinjiang cotton, but the U.S. Customs and Border Protection announced a ban on imports from five Chinese companies and one manufacturing plant (including Xinjiang Junggar Cotton and Linen Co., Ltd.) on the grounds of suspected forced labor, and H&M immediately announced to end the "indirect business dealings" with Huafu, and at the same time conducting investigations on all Chinese suppliers to ensure their employment status.
Sep 22, 2020 The U.S. House of Representatives passed the Uyghur Forced Labor Prevention Act, creating a “rebuttable presumption” that any goods made in the Xinjiang Uyghur Autonomous Region (XUAR) are made with forced labor and prohibited from entering the United States
Sep 25, 2020 U.S. government delayed the sanctions on Xinjiang Production and Construction Corps to November 30.
Nov 12, 2020 Donald Trump signed a document prohibiting any US investors from investing in companies connected to the Chinese military.
Dec 2, 2020 The US Customs and Border Protection issued a ban on the import of cotton and cotton products from the Xinjiang Production and Construction Corps.
Jan 13, 2021 U.S. Customs and Border Protection (CBP) would detain cotton products and tomato products produced in China’s Xinjiang Uyghur Autonomous Region. This ban extended from XPCC to XUAR, and was also adopted the products in the third countries.
Mar 18, 2021 According to Reuters, the European Union imposed sanctions on four Chinese officials.
Mar 24, 2021 H&M's Xinjiang statement aroused firestorm in China.

As early as the first half of 2020, the United States have suppressed the Xinjiang enterprises. In September, 2020, the United States directly mentioned it would ban the imports of agricultural products from Xijnjiang, China. Though EU made sanctions on China for human right abuses in March, 2021, some foreign brands from U.S. and EU have required to not use Xinjiang cotton on the purchasing contract in August and September 2020. Chinese export-oriented enterprises also took some risk aversion measures in 2020, to use imported cotton and imported yarn. Therefore, the H&M incident on March 24 just exposed to the public, and the actual influences on the industry are not large. For the foreign demand, higher costs are faced without relations with China's textile and apparel industry. The follow-up is more about concerns and worries about the continued political friction between political bodies such as China, the United States and Europe.

After some foreign brands boycotted Xinjiang cotton, inquiries and purchasing demand for BCI cotton from industrial customers’ increased significantly last year. With the voices of official media such as the People’s Daily on BCI, and the withdraw of Anta and FILA China from BCI, brands may change the views on BCI and it may help the digestion of Xinjiang cotton to a certain extent.

3. Overview of the current industry fundamentals
On January 14, 2021, U.S. Customs and Border Protection (CBP)'s ban on Xinjiang cotton has been extended from Xinjiang Production and Construction Corps to the Xinjiang Uygur Autonomous Region. Zhengzhou cotton futures market have not declined deeply at that time amid favorable market sentiment, but currently, the major contract has dipped below the level at that time. In 2020/21 season, the comprehensive machine-picked cotton costs are averaged at 14,500-14,700yuan/mt. According to CCFGroup, by end February 2021, China's cotton consumption is estimated to rise by 16% year on year. In terms of cash flow and profit of upstream and downstream enterprises, most ginners in Xinjiang have no cotton inventory and their profit status is much better than last year. Spinning mills also have good profits, which are possible to accumulate more product inventory. The above are relatively supportive factors.

What is still unclear is the direction of the macro currency and the degree of political friction. In the cotton textile industry, some apparel orders are concluded or under negotiation recently, but the orders remain not large overall. With the fall of cotton futures, cotton yarn and grey fabric sales weaken, and some orders are required to delay the delivery. Currently, the sell-off by cotton yarn traders has not happened, and only small traders cut prices to sell. Currently, cotton inventory in spinning mills is high, so later, spinners have limited space to continue to replenish feedstock. The continual fall of ZCE cotton futures leads to the depreciation of existed inventory in spinning mills. For the supply side, there are expectations of state cotton auction and allocation sliding-scale duty quotas. The above are the major bearish factors, but time of state cotton auction and allocation of sliding-scale duty quotas may be changed based on the Sino-US relations.
  Mar 1, 2021 Mar 25, 2021 Change Change%
ZCE May contract 16,685 14,890 -1,795 -11%
Chinese cotton 3128 16,825 15,240 -1,585 -9%
Chinese cotton yarn 32S 25,780 24,750 -1,030 -4%

Conclusion: With regard to the existing Xinjiang cotton news, export-oriented companies have already taken measures such as purchasing imported cotton and imported yarn to respond to export orders. Domestic people’s boycott to some foreign brands and increased attention to Xinjiang cotton products may result in the higher demand for Xinjiang cotton. The existing news have no big impact on Xinjiang cotton, and the influencing factors are more from the macro environment and the fears over the political friction. Currently, the major concerns are the unclear short-term monetary direction and political friction. Even the industry fundamental has some support, the upward momentum is not strong as previous time.
[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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