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Weekly: ICE Cotton Marks 3rd Weekly Decline As Virus Outbreak Shows No Signs To Subside; Sideways Trend Likely

2 Feb 2020 11:00 pm
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Mumbai (Commodities Control) – ICE Cotton lost 199 points since 24th January, last Friday’s close, as the week marks another decline in a row for cotton. Last week cotton contracts marked its biggest weekly percentage decline since mid-September.

Friday witnessed a triple digit closing in red for cotton futures, taking previous week’s double digit decline deeper, as the adverse effects of the Wuhan virus simply will not abate.

Cotton futures on ICE fell 155 points on the last trade day of the week. This was the third consecutive week of losses as investors fretted over the impact on China's economy from a virus outbreak that could hurt demand for the natural fiber in China.

Cotton contracts for March settled at 67.50 cents per lb, while it traded within a range of 67.56 to 69.35 cents a lb. May Cotton settled at 68.31 cents, down 133 points. March-May spread stood at 81 points, similar to last week’s spread at 80 points.

The entire week was, let’s say, ‘infected’ with Corona Virus and its impact on the equities, commerce and travel. It was in fact, in continuity with the previous week when market panicked on the outbreak of a new corona virus, which originated in Wuhan, China and has since spread to other parts of the world.

The United States drew China's wrath with a travel warning on Friday.

On Thursday, the World Health Organization declared the epidemic a global emergency. The deadly virus has killed more than 300 people in China, as of February 1.

Cotton Futures dipped to a month’s low on Monday weighed by the growing fears about the spread of virus. Active contract slipped to 68 cents during mid-day session, however settled at 69.51 cents at the time of trade’s close. While Tuesday was he only session that saw a double digit rebound in prices, as equities made a comeback, on easing concerns of Corona Virus outreach. Even U.S. consumer confidence jumped to 5-months high. But, the upside in cotton was short-lived.

On Wednesday, cotton market slipped again on China’s demand concerns. Market panicked in the backdrop of rising number of casualties due to Wuhan Virus. This was followed by back-to back triple digit losses over next two sessions.

Cotton market even sloughed off bullish export sales on Thursday as Virus was reported to have made its way into other parts of the World. March contract on ICE downed 101 points to settle at 69.05 cents per lb.

Global equity markets were poised for their first monthly loss since August owing to fears of virus impact of global economy.

Concerns over the outbreak overshadowed the positive weekly export-sales data.

The weekly Export Sales report from USDA showed 347,123 RBs were sold for the week ending 23rd January. That is the most this marketing year, but futures ‘sold the fact’. Cotton bookings were 12.8% above last week, and 48% from the prior 4-week average. The sales were 113.15% larger than that from the same week last year. Exports from the report were 327,079 RBs, which was 15.74% above last week, and 37.1% higher YoY.

China accounted for 109,862 RBs of the weekly sales. The weekly sales to the PRC were 31.65% of all bookings, which is the MY high for China’s percent share of weekly sales. Cotton exports to China were at their highest level since the week ending April 5th 2018. China also purchased 30,800 RBs of 2020/21 cotton.

However supply side may likely trouble cotton prices as Outside of the US there is still some West African, Brazilian old crop and a decent chunk of Indian cotton available. However, the good news is that the West African basis is quite stiff and unlikely to drop by much, while the Indian surplus is in the hands of the CCI, who has vowed not to sell it below its procurement price. In other words, it is most unlikely to see much price pressure over the coming weeks.

Moving deeper into the season, there’s Southern Hemisphere’s new crop available, but Australia will have a tiny output this year due to drought conditions. So Brazil will be the main supplier. This could pose some challenges as there are limits as to how much Brazil is able to ship every month.

The weekly Commitment of Traders report from 28th January showed that managed money added to their longs by 4397 contracts, whereas trade reduced their short positions by 3136 contracts. So the cotton speculative traders were 7,533 contracts more net long wk/wk. The report showed that managed money held their strongest net long for cotton since December 11th 2018. The open interest stood at 315,318 contracts, up 11,809 contracts from the previous week.

Experts observe that speculators are currently on the sidelines, which leaves the trade in charge. Mills will fix on dips and buy additional supplies from merchants, which is going to reduce the amount of current crop shorts needed.

This should add up to net buying between now and June, unless outside factors come into play to change the narrative.

Upside potential seems limited, given the supply that India is able to bring to the market if prices were to increase by a few cents. A sideways trend between 68 and 72 cents, therefore, still makes the most sense.

(Commodities Control Bureau)

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