Cotton Prices Are Expected To Strengthen After The Stabilization

Compared with last year, although cotton prices are at a low level, there are few changes in fundamentals. The output is basically flat or slightly fluctuating from last year. The State Reserve ship has fallen to a relatively low level on schedule, and cotton fundamentals remain good overall. However, some factors have changed compared with the previous year, mainly due to changes in market expectations of consumption and imports.

Limited consumption space

The strong growth of cotton consumption has been one of the main factors supporting cotton prices in recent years. However, after the 2018-2019 year, the downward pressure on the macro economy has made the market's consumption expectations change. It is estimated that cotton consumption in this year will probably change from the 2015-2016 year high speed growth trend to the downward trend.

Indeed, since the beginning of 2018, the retail sales of textile and clothing have shown a continuous downward trend, and when external factors began to reflect reality, in 2018 11-12, textile and clothing export sales also showed a sharp decline compared with the same period last year, which disturbed the market's anticipation of future cotton consumption.

The impact of macroeconomy on consumption is obvious, but the downturn in consumption caused by economic downturns should be slow. In contrast, the impact of external factors will be more rapid and direct, especially when market sentiment is generally pessimistic.

Although the export volume of China's textile and clothing is indeed large, the proportion of total exports and domestic sales is still limited.

Moreover, despite the rapid development of textile and garment industry in Southeast Asia in recent years, China still has an irreplaceable competitiveness in the industry regardless of its volume and cost. That is to say, even if external disturbances persist, the reconfiguration of industrial resources in the world also needs time.

Therefore, consumption in 2018-2019 is likely to slide, but there is limited room for decline.

Price center is expected to move upward.

Another factor that is expected to change is imports, because our country implements an import quota system for cotton. So in recent years, domestic cotton imports continued to be stable at 1 million tons. However, the reduction of the 800 thousand tons sliding quota and sliding tax rate last year to maintain stable cotton prices led to a 1 million 600 thousand tonnes of cotton import forecast this year.

In the context of declining consumption, a significant increase in cotton imports will largely reduce the gap between supply and demand of core elements of cotton prices.

In the context of the normalization of cotton production and marketing gap and the continuous decline of State Reserve inventories, the increase of cotton imports is inevitable.

However, the increase in import quotas this year is a response to specific circumstances, especially when the stock of cotton is still relatively adequate and new cotton is beginning to be listed in large quantities, which makes the supply pressure of short-term cotton further expanded.

But combined with global supply and demand, the supply pressure of imports may only stay above expectations.

2018-2019, the global cotton supply situation is not very good. First, the United States, due to weather reasons, there is a significant decline in cotton production and quality; moreover, India, despite the lack of data from the US Department of agriculture, has cut its cotton production to below 5 million 700 thousand tons this year, and because of its good inventory and MSP support, India cotton prices continue to operate at a high level. In addition, due to drought, the market's prediction of Australia's cotton output has also been adjusted to around 500 thousand tons. The increase of cotton production in Brazil may be an important complement to the supply of cotton in the whole year, but its cotton exports are coming to an end this year.

Therefore, in view of the global availability of cotton resources, despite the increase in domestic cotton import quotas, there is still a lot of doubt on the implementation of the actual cotton procurement.

On the whole, the decline of cotton consumption under the pressure of domestic demand and foreign trade is an objective fact, but its amplitude is still controllable. On the other hand, the increase in imports is also a trend. But according to the global supply and demand of cotton, the increase of density inside and outside cotton is likely to become another strong support for its price.

In addition, the existing industrial and commercial inventories and warehouse receipts pressure is also more phased. Combined with the whole year's cotton supply and demand situation, cotton is still going to inventory logic, while the continuous decline of state reserve inventory gives cotton prices more room for change.

Therefore, short term cotton prices may still be a low-level arrangement dominated by stage supply pressure and pessimistic consumer expectations, but as market sentiment improves and orders recover, cotton prices are expected to return to their normal supply and demand logic, that is, the price center of gravity should be shifted upward, and new cotton planting, weather conditions, state reserve policy, structural supply and other factors may also become a new driving force.