Recently, there are many factors plaguing the cotton market. There is a general consensus that the downstream demand is weak. The profits of the spinning process are reduced, and the weaving industry is even more meager. However, the price of cotton is still strong. Enterprises hope that the price can return to 15,000 yuan/ tons nearby. Although ICE cotton has been hovering around 80 cents recently, domestic cotton prices are still very resilient and refuse to make deep adjustments. The author analyzes that once the external market resumes its upward trend, domestic cotton will be easy to rise but difficult to fall. Here’s why:
U.S. interest rate hikes have little impact on cotton
On Wednesday, the ADP employment agency reported that U.S. ADP employment increased by 497,000 people in June, more than double the expected value. The strong employment data also made the market believe that the Federal Reserve will continue to raise interest rates. According to CME (Federal Reserve Watch) data, the market expects that the probability of the Federal Reserve keeping interest rates unchanged in July is 13.8%, and the probability of raising interest rates by 25 basis points to a range of 5.25%-5.50% is 86.2%.
How much impact will the interest rate hike in July have on cotton prices? Judging from the trend of ICE cotton in the external market, after bottoming out in November last year, the impact of this year’s interest rate hike on the market has gradually weakened. The price of the interest rate hike in May was around 80 cents, and it is still at this price level. Macroeconomic factors have an impact on the market. The impact is diminishing. Even if interest rates are raised by 0.25% in July, it will have little impact on ICE cotton.
The quantity of imported cotton has declined in the past two years. The domestic cotton price trend is mainly driven by domestic factors. Under the U.S. interest rate hike cycle, Zheng cotton has gradually risen since November. The benefits of domestic interest rate cuts have completely offset the impact of U.S. interest rate hikes. The depreciation of the RMB is also beneficial. Textile exports, even if the US interest rate hike in July will have little domestic impact.
Raw material resource parties have more say
Since May, cotton prices have continued to rise, while demand for cotton yarn has been tepid, making it difficult to raise prices. Cotton yarn has risen less than cotton, and profits have narrowed. It is understood that from January to May, the profit of spinning mills was generally around 1,000 yuan/ton. After May, the profit of spinning dropped to 500 yuan/ton. If financial costs are included, it is basically the same. It is difficult to increase the price of cotton yarn. The main reason is that the downstream gray cloth textile link has a balanced profit or even a loss.
Many people believe that downstream demand is weak and cotton prices are difficult to rise, but the reality is that cotton spot prices have been rising recently, the basis is strong, and high-quality cotton resources are in short supply. Data from the National Cotton Market Monitoring System shows that the national cotton sales rate is about 98%, which means Cotton consumption has shifted to mainly digesting inventory. In the remaining two months of 2022/23, cotton resource parties have more say and stronger bargaining power. When prices fall, they will inevitably be reluctant to sell, while cotton spinning industry inventories are generally at 1 For about a month, we can only accept high-priced cotton.
The average price of cotton is expected to increase
After the national Xinjiang cotton target price policy for 2023-2025 was announced, the Xinjiang Production and Construction Corps recently formulated a plan to actively and orderly promote the withdrawal of inferior cotton areas, striving to withdraw from cotton cultivation in 16 regiments in non-advantageous cotton areas by the end of 2023. The planting area of individual group plants shall not exceed 2020. If we include the local government’s requirement to reduce cotton and grain production in some areas, Xinjiang’s cotton output is likely to be reduced to about 5.1 million tons, and expectations for future production reductions will continue to increase.
From the current point of view, the price difference between domestic and foreign cotton is flat, and the price advantage is gradually lost. The rising power in the later period will mainly rely on ICE cotton. Otherwise, domestic cotton will enter the stage of rising and falling, and the probability of continuing to rise in a straight line is small. However, the domestic cotton production reduction is expected to be clear, and the absolute price of ICE cotton is low, so Zheng cotton may rise more easily than fall.
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