The rally came to an abrupt end. Why did cotton, which bottomed out, fall back?

The main contract of Zheng cotton futures hit a low of 12,270 yuan/ton on October 31, 2022, and then bottomed out, with a three-month upward trend. On February 2, the main contract…

The main contract of Zheng cotton futures hit a low of 12,270 yuan/ton on October 31, 2022, and then bottomed out, with a three-month upward trend. On February 2, the main contract rose to a maximum of 15,275 yuan/ton, and in the following days Japanese cotton futures fell during a correction.

An industry insider bluntly stated that cotton futures prices have risen to varying degrees recently, with current futures prices rising by more than 20%. This also indicates that industry insiders have optimistic expectations for the market outlook. However, prices have corrected in the past few trading days. The market’s expectations for an improvement in demand are quite strong. If the reality fails to keep up, the upward momentum will weaken. Therefore, the key is to pay attention to the actual demand situation downstream.

Why do cotton futures continue to rise? “The price of Zheng cotton at the end of October last year was in the historically low price range, with a low valuation. It has long-term investment value and attracts funds from outside the industry to enter the long market. From the perspective of expectations, my country will optimize and adjust its epidemic prevention policies from December, and market expectations The shift to optimism has triggered a rebound in cotton prices,” said Wu Jingwen, cotton researcher at CITIC Futures.

Galaxy Futures cotton analyst Liu Qiannan also believes that the continuous optimization of epidemic prevention and control policies and the improvement of pessimistic consumption expectations, especially after the government proposed to promote domestic demand, have led to continued improvement in domestic demand expectations for cotton. In addition, the Fed’s slowdown in interest rate hikes has also made commodities relatively strong.

Mr. Li, a cotton trader in Henan, told reporters that driven by strong expectations, downstream textile mills have a positive purchasing mentality for raw materials. Before the Spring Festival, weaving mills and cotton yarn traders increased their raw material purchasing activities, driving textile companies to significantly reduce their cotton yarn inventories, from 30 The historical high of about 10 days is about to reach the historical low of about 10 days. The downstream supply of raw materials and the reduction of finished product inventory have driven up the cotton price.

Since it is still the time when new cotton is on the market, commercial inventories have increased significantly. According to data from the China Cotton Information Network, the national cotton commercial inventory at the end of December was 4.62 million tons, an increase of 940,000 tons month-on-month and a year-on-year decrease of 940,000 tons. Among them, there are 4.07 million tons of cotton stored in Xinjiang, 450,000 tons in mainland China, and 100,000 tons in bonded areas. Since the launch of new cotton this year is slower than the same period in previous years, it is expected that the commercial inventory of cotton will still be high. According to data from the China Cotton Information Network, as of the end of December, the industrial inventory of textile companies was 550,000 tons, a decrease of 260,000 tons from the same period last year, and was at a low level in recent years. “From the cotton supply side, cotton supply is very sufficient in a short period of time. On the demand side, downstream orders are expected to improve before the Spring Festival. The Spring Festival holiday is shortened, gauze stocks decline, and cotton yarn prices tentatively rise. After the Spring Festival, as textile companies resume work At present, downstream demand is acceptable,” Liu Qiannan said.

In terms of downstream demand, end-use textile and apparel demand data lags behind, internal and external differentiation occurs, exports are weak, and domestic demand is waiting for recovery. In 2022, my country’s demand for textiles and clothing will shrink. In terms of domestic demand, in December, the retail sales of clothing, shoes, hats, needles, and textiles were 132.1 billion yuan, a year-on-year decrease of 12.5%. The cumulative retail sales in 2022 were 1.3003 billion yuan, a year-on-year decrease of 6.5%. Looking forward to this year, as my country’s economic growth increases and the epidemic situation improves, domestic demand is expected to recover; in terms of exports, my country’s exports of textile yarns, fabrics and products in December 2022 were US$11.0029 billion, -22.97% year-on-year. “Looking ahead to this year, due to high overseas inflation and high clothing inventory constraints, overseas textile and clothing demand continues to shrink, and my country’s textile and clothing exports may be difficult to improve.” Wu Jingwen said.

On the textile side, the operating rate of pure cotton yarn mills increased by 16.5% to 55.5% month-on-month, and the cotton inventory of textile enterprises increased month-on-month. From 2.5 days to 21.5 days, the cotton yarn inventory of textile companies was -0.2 days to 10.1 days month-on-month, the operating rate of cotton gray fabrics was +28.3% to 52.4% month-on-month, the cotton yarn inventory of weaving factories was +0.3 days month-on-month to 12.8 days, and the inventory of cotton gray fabrics was -0.2 days month-on-month. days to 33.9 days.

According to the USDA supply and demand report, U.S. cotton production in 2022/2023 is expected to decrease by 620,000 tons year-on-year, consumption is expected to decrease by 80,000 tons year-on-year, exports are expected to decrease by 570,000 tons year-on-year, ending stocks are expected to increase by 100,000 tons year-on-year, and the inventory-to-consumption ratio is expected to increase year-on-year 7.74%. Although U.S. cotton production is reduced, weak end-use textile and clothing demand has led to a decline in U.S. cotton export demand, making the U.S. cotton inventory-to-consumption ratio expected to increase year-on-year, suppressing ICE cotton futures prices in the medium and long term. On the supply side, U.S. cotton inspection progress is coming to an end. As of the week of January 26, the cumulative inspection volume of U.S. upland cotton was 3.0229 million tons, a year-on-year decrease of 15.5%, accounting for 97.70% of the estimated upland cotton production; on the demand side, focus on the weekly USDA Signing and shipment data, the latest data shows that as of the week of February 2, 2022/2023 U.S. upland cotton weekly contracted 38,800 tons, a weekly decrease of 19.9%, and weekly export shipments were 48,100 tons, a weekly increase of 20.74%. If the Data continues to improve month-on-month, which will support ICE futures prices.

In addition, USDA slightly increased US cotton production by 95,000 tons in January to 3.196 million tons, which is still at a low level in previous years. This is mainly due to the high abandonment rate of US cotton this year. In the new year, relevant foreign institutions predict that the US cotton planting area in 2023/2024 is expected to be 11.57 million acres, a decrease of 7.2% from the actual sown area this year. “However, considering that the low output this year is mainly due to the high abandonment rate, and the expected drought situation in the main producing areas in the new year, although the intention to plant cotton in the new year declines, the final output may actually increase.” Liu Qiannan said.

It is worth noting that the signing situation of US cotton this year has been poor before, with the weekly contract volume only maintaining around 20,000 tons. The contract situation has improved in the past three weeks, with the contract volume of about 40,000 tons. baseAccording to USDA data, as of January 26, the cumulative contract volume of U.S. upland cotton for the 2022/2023 season is 2.144 million tons, and the contract progress is 84%, which is one percentage point lower than the five-year average.

The above-mentioned interviewees believe that China’s current consumption expectations have improved and orders have increased, and the global economic growth forecast IMF data at the end of January has also increased compared with October. It is expected that the supply and demand situation of US cotton will gradually improve slightly this year.

Wu Jingwen believes that in the domestic market, optimistic expectations for an improvement in market demand are the main reason for the recent price increases. After the holiday, downstream textile factories have resumed work one after another, and the resumption time has been earlier than in previous years. The start-up rate has rebounded significantly, and the inventories of raw materials and finished products of textile companies are at low levels. , there is room for replenishment, but the motivation for replenishment depends on the ability to accept subsequent orders. Currently, production is mainly based on pre-holiday orders, and there will be a temporary shortage of new large orders after the year. The finished product inventory of the weaving factory is still at a high level. If the ability to accept subsequent orders is Poor performance and slow destocking will hinder the upward price movement. The current conjecture of improving demand is difficult to falsify. The support below the cotton price is strong and the downward drive is not strong. In the short term, it is expected to continue the strong oscillation trend.

The current trading logic of cotton is whether the expected improvement in consumption can be gradually realized. At present, downstream consumption is acceptable. Whether the improvement on the consumer side can be sustained in the future will directly affect the trend. “As for the market outlook, domestic consumption will maintain a good momentum in the short term with the arrival of the small peak season in March and April, while the international market is expected to slowly improve as the pace of the Fed’s interest rate hikes slows down. Global economic growth is expected to slowly improve, and foreign consumption expectations are also expected to improve. It will gradually improve. However, global cotton planting area is expected to decrease in the new year because the planting income is not as good as that of corn and wheat. Moreover, the first half of the year is also a season prone to weather speculation. These factors will have a positive impact on the trend of cotton. It is expected that in the future Cotton prices will maintain an oscillating upward trend.” Liu Qiannan said.

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Author: clsrich