In continuation with coronavirus spreading from China to across the globe, with almost 109 countries confirming COVID-19 cases, and several countries reporting suspected cases, the outbreak has already placed the world on a public health high-alert.
World indices are continuing under pressure and trading lower in view of no effective results to control the virus. In India, around 74 cases have been reported till now and are increasing day-by-day despite the government taking required measures. In view of the same, India has announced an unprecedented lockdown to contain and combat the virus. India has notified cancellation of all non-official visas to curb incoming traffic, and advised against all non-essential travel abroad, which also curbs outgoing travel.
These developments have hampered trading activities worldwide, most of the stocks and commodities are trading lower beyond technical and fundamental view. Cotton market seems to have reacted a little slow, and is now trying to trade lower, in line with other commodities and international market.
ICE cotton futures hit 5-month low on Thursday, March 12, in a broader markets sell-off after the US imposed restrictions on travel from Europe that sparked demand fears.
US export sales for week ending 03/05/2020
Concerns over the Covid-19 outbreak overshadowed data from the United States Department of Agriculture (USDA) that showed net sales (of 484,200 running bales) were up 22% from the previous week (and 62% from the prior 4-week average), hitting a fresh marketing year high.
This shows cotton market is cheap for buyers to buy and good demand can continue at lower levels. Primarily net sales for Pakistan (161,600 RB), China (90,900 RB, including decreases of 900 RB), Turkey (84,100 RB), Vietnam (47,400 RB, including 700 RB switched from Japan), and Bangladesh (32,800 RB), were offset by reductions primarily for Japan (3,900 RB) and Thailand (1,200 RB). For 2020/2021, net sales of 160,400 RB were primarily for Mexico (91,600 RB), Turkey (20,100 RB), China (15,900 RB), Pakistan (11,400 RB), and Honduras (6,100 RB).
Cotton prices have dropped more than 11% so far this year and hit a 5-month low at the end of last month on lingering concerns over demand for the natural fibre as the virus outbreak intensified. Pakistan, Turkey, Vietnam & Bangladesh are top four buyers for US 2019-20 crop for the given week & same can be for next weekly sales too. Pakistan is participating due to comparatively cheaper cotton available from US & also due to trade restrictions for Indian cotton which can be cheaper & more promptly available.Bangladesh is enjoying benefit of the same-when Indian cotton gets cheaper they buy good quantity for prompt shipments.
Stock markets are crashing
The stock market was sharply lower on 9th March and continues lower amid a crude oil fight between the Saudis and Russia, spreading COVID-19, and central bank rate cuts that do nothing to stop the virus. After Saudi government’s indication to raise its oil production, Brent crude is trading lower than US$ 35 per barrel.
Indian spinners await CCI’s cotton selling strategy
Indian cotton is trading on bearish note with lower daily arrivals comparative to previous week. Cotton Corporation of India is continuing its operations to buy cotton at MSP, supporting Indian prices well from the start of season and committing to support farmers till the end of the season. However, Indian spinners/ traders are feeling helpless without selling strategies of CCI, CCI is carrying around 30% stock of Indian total estimated cotton production of the season 2019-20.
Indian cotton prices may be pushed down
Indian cotton prices are coming down but trading with very narrow to narrow price range comparatively. If the situation continues for another 15 days to a month, Indian cotton prices will have to come down to the level of world cotton prices to compete.
Within two weeks, Indian currency weakened and is trading below Rs 74 against the dollar. This lent support to Indian cotton prices, but not enough – Indian cotton is still not competitive in the export markets, as ICE fell faster than Indian prices.
But due to slowdown in China, Indian spinners are getting benefited. They have good orders for yarn, and the weaker Indian currency has made Indian yarn prices more competitive. As of now spinners are having decent margins with good demand of yarn and availability of raw cotton at reasonable prices within India.
RBI can look into the weaker Indian currency and can take some immediate measures to reduce the pace of weakness. If ICE May continues to move down towards 55 cent level, and Indian prices remain supported by CCI and other factors, cotton imports can be more attractive and cheaper for Indian spinners. This year, stretched winters in India, untimely rain and continued hail storms in the northern region could cause damage to standing crops.
Indian MCX cotton prices continued to report cheaper compared to physical cotton prices. MCX March is trading around Rs 37600-37,700 per candy (without delivery expenses) against physical market cotton prices trading around Rs 38400-38,500 per candy.
Indian stock markets are in downward spiral too
Indian indices are in bad shape now and trading with panic selling. On Friday 13th March, Sensex (29700 with lower circuit) opened and got lower circuit (appx 9.5% down) within six minutes of opening, Nifty is also trading with lower circuit (appx 10%) at 8600 level. Once things settle down, there is hope that the stock market will recover fast, but this can be wrong for cotton.
(Vimal Verma is a Cotton Trader)