Since the first quarter of 2023, domestic cotton prices have maintained a volatile upward trend. There are many bullish reasons for market expectations that the Fed’s interest rate hike is coming to an end and cotton fundamentals have improved. However, the recent sharp correction in Zheng cotton prices has caught the market off guard. Is it the cotton spinning market? Is it due to the upcoming off-season?
1. The Federal Reserve’s interest rate hike is coming to an end, but financial risks have not yet been eliminated.
In early April, the minutes of the Federal Reserve’s March meeting showed that the global financial instability crisis triggered by the collapse of two regional banks in the United States had been effectively managed, effectively stabilizing market sentiment and preventing the occurrence of financial systemic risks. Ultimately, the Federal Reserve decided to continue raising interest rates in March. 25 basis points. The March dot plot shows that the median end point of interest rates in 2023 is 5.125%. Most participants believe that the policy interest rate in 2023 may be between 5% and 5.25%, which means that May should be the last interest rate increase. Supported by the above views, commodities including cotton have experienced a rebound. However, the recent negative sentiment caused by high interest rates in the U.S. financial market has continued to ferment. The market is worried that a similar Silicon Valley Bank incident will occur again, and the entire commodity has begun to correct. At the time of the survey, the companies surveyed had already expressed concerns about the Federal Reserve’s determination to raise interest rates and reduce inflation to 2%. Now that the market’s concerns have been verified on the market, the subsequent impact of the Federal Reserve’s interest rate hikes on the financial market will continue.
2. The cotton planting area in the new season will decrease, and the market may be further speculated.
During the survey, it was found that there is currently a trend in the market to speculate on the decline of cotton area in Xinjiang. In response to the increase or decrease in cotton planting area in Xinjiang this year, the National Cotton Market Monitoring System conducted a national and Xinjiang cotton planting intention survey and statistics as early as March this year. Relevant data shows , China’s intended cotton planting area in 2023 is 43.891 million acres, a year-on-year decrease of 2.279 million acres, or 4.9%. Among them, Xinjiang’s intended cotton planting area is 38.425 million acres, a slight decrease of 893,000 acres, or 2.3% year-on-year. Since the survey at that time was intended seeding data, there will be a certain difference from the actual seeding. At present, the spring sowing work has not yet ended, and the actual cotton planting area has not yet been calculated. Market participants believe that the cotton area has dropped by 5-10%, and some even believe that the area has dropped by 15%. However, the actual decline is still unknown. This kind of speculation may This will provide some support for cotton prices.
3. The operating rate of textile enterprises remains high and product differentiation is serious.
According to a survey by the National Cotton Market Monitoring System, in early April 2023, the startup rate of the sampled companies was 91.9%, indicating that textile companies have basically reached full operation, indicating that orders are still relatively sufficient. During the actual investigation, it was found that there are two problems here. First, the finished yarns are seriously differentiated. Some mid- to high-end yarns sell well and are even in short supply, while the sales of medium- and low-count yarns are not good. Capable companies adjust their products to increase their sales. The second is that cotton yarn inventory has not really flowed into the downstream production links. For example, yarn inventory in Zhangcha Market, Foshan remains high. The reason for the above situation is that downstream companies now mainly place orders for spring and summer, and manufacturers mostly use light and thin fabrics; secondly, traders have a large stock of yarn. They believe that the future cotton yarn market will maintain a volatile upward trend under the background of consumption recovery. trend, so the enthusiasm for depositing yarn is high.
4. The inventory of downstream companies is low, and there are hidden worries in the market
The survey found that the current inventory of raw materials and finished products in enterprises remains low. Although product profits are relatively good, production is relatively conservative and they dare not keep large quantities of raw materials in inventory and buy as they are used. Some enterprises even have a situation where cotton yarn and cloth are in short supply. Taking cloth as an example, one interviewed company said that the profit of a loom now reaches several thousand yuan a month, and the production efficiency is very good. Nowadays, companies have low inventories and just need to purchase. As long as cotton prices fall, point-price purchases will occur, which also provides certain support for cotton prices.
According to a survey by the National Cotton Market Monitoring System, as of early April 2023, the average cotton inventory usage days of the sampled companies was approximately 32.4 days (including the quantity of cotton imported to the port), and the yarn production and sales rate of the sampled companies was 102.1%; The production and sales rate is 100.9%. The above data are consistent with the actual survey. In April, corporate orders were still relatively sufficient and production remained good. However, after May, the market gradually entered the off-season, and companies have doubts about whether orders can continue to keep up. Once cotton yarn prices fall, trade will Panic selling by merchants will inevitably affect the trend of cotton prices. This is a problem that companies will be more worried about in the future.
5. Terminal clothing inventory is large and enterprises can destock through multiple channels
This investigation revealed that although the midstream and upstream cotton spinning production and sales are good, the final consumption of clothing is poor, clothing inventory is large, especially the US and European foreign trade export markets are poor, which has a negative impact on domestic clothing exports. An interviewed clothing company said that it was difficult to find high-quality suppliers in the past because most suppliers were accepting foreign trade orders and their profits were better than domestic ones. Now such suppliers are easy to find, and the difficulty of finding and cooperating has been greatly reduced. Enterprises rarely pay attention to the price changes of cotton raw materials. The main reason is that cotton accounts for a low proportion of clothing materials and is used in small amounts. Cotton price changes have little impact on clothing costs. Comparatively speaking, companies pay more attention to changes in crude oil and chemical fiber prices, because chemical fiber raw materials are used in large amounts and the price fluctuations are also large.
The clothing companyIt shows that the total amount of cotton raw materials used by clothing terminals has not changed much. Since cotton fiber is not as fast as chemical fiber in functional innovation, the application fields of clothing products are relatively limited. In the long term, as clothing application scenarios become more diversified, cotton usage may show a slight downward trend. For cotton, the price changes caused by the supply side are greater than those caused by the consumer side. In order to welcome new season products, companies are working hard to clear old inventory through factory stores, promotions and other channels.
Overall, in the context of domestic and foreign macro-environmental risks that still exist, the long and short factors in the market are intertwined, and the fundamentals of cotton supply and demand are superimposed. Cotton prices will still maintain a range-bound trend. In the future, with the gradual recovery and development of the economy and consumption , the center of gravity of cotton prices is expected to slowly move upward.