A short supply of cotton is pushing up prices in the India’s domestic market. Cotton spinners are feeling the heat as downstream demand is dull, there is overcapacity of cotton yarn with spinners, and the high fibre prices are further squeezing their margins.
India, the world's largest cotton producer, is now importing a lot of cotton from the US and even Pakistan, even as Pakistan was importing cotton from India. But now finds US cotton to be more lucrative. Some large cotton consignments from Australia are also expected to reach the markets in South India by mid-August.
Cotton sowing in Gujarat, the largest cotton producing state, remains low due to deficient rains. Traders believe that if the situation does not improve in the next few weeks, Gujarat will become the main cotton buying state in the next cotton season.
Meanwhile, the bullish sentiments in the cotton market are expected to continue for the following reasons:
1. Monsoon position
2. Low sowing across the country
3. Cotton inventory shortage
4. News of pink bollworm damage
5. Strong USDA weekly sales report
6. Strong international cotton spot market
7. MCX ICE, China Future Exchange price support
8. Good demand
Cotton sowings in country have begun picking up. Market analysts feel the current situation of volatile prices could be contained if spinners stop operations for two days a week, instead of the current one day a week. This would make it easier for them to cover their cotton positions for the 15-30 days. And bring in some stability in the market. The large inventories with spinners has forced them to reduce their export prices too, by Rs 5-7 a kg.
Market watchers have estimated the following trend:
1. Stocks available in India is estimated at 22 lakh bales;
2. Inventories with mills may cover on average 30 days, that is around 25 lakh bales
3. Imports may cross 15 lakh bales to reach around 18 lakh bales this year
4. As on August 1, the market thus has around 65 lakh bales till October 30
5. Total demand is for 80 lakh bales
Arrivals will peak from December 15 onwards. Thus, spinners can expect a difficult situation for the next few months. Market prices are expected to remain range bound for the next three months from Rs 47000-52000. A significant fall in cotton prices is not expected till November 30.
Indian spinners lower yarn prices
As cotton prices fell last week from a high of Rs 52000 to around Rs 47000-48000 level, spinners and weavers are apprehensive of facing mounting losses if prices move down further. Yarn prices have dropped by around Rs 5-10 a kg last week. It is expected that yarn prices may fall by another Rs 5 a kg, and remain in that zone till October, notwithstanding unforeseen circumstances.
Focus on Gujarat
Gujarat is waiting for widespread rains to get good yields. Currently, it is believed that cotton output in Gujarat can be much lower than in previous years. Gujarat's position as the largest cotton supplying state may change in the next few years, as new spinning capacities are coming up in Gujarat. Gujarat accounts for 20% of the country's cotton production.
Kadi alone is attracting a lot of spinning capacity. Currently, there are 1.42 lakh spindles in Kadi, and more than 1.5 lakh spindles are expected in the next year and a half. It is estimated that cotton consumption in this district will be on average 5 lakh bales from 2017-18 season.
With at least 50% of the state's cotton output being consumed within the state, Gujarat could become the yarn supplier to the domestic market. And mills in Tamil Nadu will need to relook at their strategies.
China sells 100% daily cotton reserves quota
China has been selling 100% of the daily stock of reserve cotton of around 30,000 tons per day. Prices range from 14400-16040 yuan/ton. The industry is calling for bigger daily reserve supply, continued selling before new crop arrival and more import quota to purchase high quality lots. From the targeted 2 million tons of reserver cotton sales for this season, around 1.4 million tons have been auctioned so far.
However, the cotton textile industry in China is worried about the losing sheen of cotton. Chinese cotton textile exports used to account for more than 40% of the total textile exports, but has dropped to 30% in the past years. Cotton's share in fibre consumption also fell below 35% and the industry acknowledges that its cotton products are losing competitiveness in world market. The textile and garment sector accounts for about 13% of export trade and about 12% in employment. State Council is deeply concerned about the volatility in cotton price. Government is expected to allow market forces to correct the situation.
Meanwhile, the recent flooding in China's Yangtze River Basin could have damaged some of the cotton crop, even as markets await some estimates. Weather forecasters estimate that more than a quarter of China's cotton crop has been impacted, to varying degrees, by the excessive rainfall seen in early July. Official estimates of crop losses are probably still a few weeks away.
With Chinese mills buying up the daily stocks since May, questions abound:
1. Why is all the cotton sold out everyday?
2. Can this lead to higher world cotton prices next year?
3. Is yarn demand expected to pick up in China in the coming days?
4. Or, is China trying to push up cotton prices?
The 2016 world crop, estimated at 103 million bales is 5 million more than 2015 production, but smaller production in China and the potential for only a limited increase in India will work to keep world stocks low.
World area planted to cotton represents the lowest acreage since 1986 and 1975, respectively. It is noted that world yields fell 5.1 and 5.5%, respectively in those crop years. While yields are not expected to fall that much in 2016, it is noted that if world yields were to fall 5% then world production would drop to only 82 million bales. As stated, this is not expected, but given the Chinese and Indian weather problems it must loom as a possibility. Additionally, it is noted that Chinese acreage is expected to be the smallest since 1960.
This sets the stage for improved US exports during a period when the US would otherwise face a very large build-up in its domestic carryover. Additionally, the larger US production makes it feasible for the US to continue to supply cotton to both Brazil and India because of their 2015 production woes.
Chinese reserve stocks continue to sell at the pace of some 30,000 bales daily. If the Chinese target of selling 9 million bales of reserve cotton this year is met, it could change the global cotton balance sheet. The world balance sheet could quickly move to a world carryover shortage scenario given the 12 million bale production-consumption deficit last year and now the potential 9 million bale gap this year. Could it be that the world's excess supply situation is well on its way to being resolved?
So where do we go from here?
Considering that we have the second tightest ending stocks since 2009 and given the much higher price levels in China and India, the US market has been too cheap at 65 cents and was therefore forced to adjust to a higher price plateau.
A 73 cents futures means that US high grades are now priced in the mid-80s landed Far East, which may still be on the cheap side when compared to the 90+ cents in India and 100+ cents in China. But both Chinese and Indian prices will eventually come under pressure as we approach harvest and that US prices should therefore no longer have to play catch up.