China began sales of 600 kt of its reserve cotton from July 5, and will continue till September 30, 2021.
Here is a comparison of the detailed rules about the state cotton reserves sales in recent five years, and influences of reserves sales on the market combined with the base selling prices and the reserved cotton quality last year.
Comparison of state cotton reserves sales policy
First of all, from the perspective of the total selling volumes, the 600kt of reserved cotton is in line with the market expectations. The primary logic is the remaining reserved cotton stocks in state warehouses: 1.24 million tons of 2012/13 Chinese cotton + 0.37 million tons of 2019/20 Chinese cotton + unrevealed imported cotton quantity in 2018/19 season and afterwards.
Looking from the stock status, the 2019/20 reserved cotton quantity is limited, and the 2012/13 reserved cotton is aging. Therefore, it is necessary to sell the aging cotton and reserve into the new cotton.
One can infer the reserved cotton strategy of the next year to a certain extent: if this round of 600kt of reserved cotton is all sold, it is very likely to continue to auction 600kt of reserved cotton next year.
Meanwhile, new cotton is also needed to be reserved this year. The announcement on July 2 has mentioned the opportunity to reserve Chinese cotton. Moreover, the Sino-US trade agreement continues, and it is also likely to reserve some imported cotton.
Viewed from the previous cotton auction, the state cotton auction is only to increase the supply in short term, and it will have no big impact on market supply in medium to long run. However, there is one notice in this announcement: during the state cotton reserves sales, if major changes occur in the domestic and foreign cotton markets, necessary adjustments to the reserves sales arrangements are required according to the regulatory opinions of the relevant departments. If the cotton supply is very tight, to increase the supply of old reserved cotton is possible. Nevertheless, this notice has little impact on the market and is only considered as a potential risk.
The daily selling volumes of reserved cotton are supposed to be 9,000-10,000 tons, which will put certain pressure on the market.
For the base selling price, the major change: during the auction, if the domestic cotton price index declines more than 500yuan/mt in total for three consecutive days, the auction will be suspended next working day, and when the domestic cotton price index does not decline for three consecutive days, the auction will restart the next working day. This will make the cotton prices hard to fall sharply.
The base selling price
According to relative regulation, the base selling price of the week during July 12 and July 15 is 15,724yuan/mt (standard type price), up 223yuan/mt from the previous week.
The base selling price of the week during July 5 and July 9 was 15,501yuan/mt (standard type price).
Compared with current grade-3128 cotton on spot market, the base selling price is lower nearly 1,000yuan/mt, and compared with the standard 3128 cotton price on auction, the actual reserved cotton sold will be lower by more than 1,000yuan/mt. Therefore, the state cotton auction is indeed favorable for spinners producing low-count cotton yarn and conventional cotton yarn, and the competition may be fierce.
Overview of the reserved cotton quality in 2020
In terms of the reserved cotton quality last year, the colour index of 2012/13 cotton is mostly the yellow stained and tinged cotton, the length is mostly above 27mm and the strength is mainly above 26gpt, which can meet the production demand of low-count cotton yarn and conventional cotton yarn 32S and 40S.
In general, the market supply will increase somewhat in short and medium run and the spot cotton digestion will slow down, with the daily selling volumes of reserved cotton of 9,000-10,000 tons.
Moreover, the 2012/13 reserved cotton could meet the production need of low-count cotton yarn and conventional cotton yarn 32S and 40S. Besides, the state reserves sales will suspend when the domestic cotton prices decline more than 500yuan/mt for the three consecutive days, which will ensure that prices will not fall sharply.