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Weekly: Net Shorts Deepen As ICE Cotton Cracks To Decade’s Low; Experts Cautiously Optimistic Of Mkt Bottom

23 Mar 2020 7:26 am
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Mumbai (Commodities Control) – ICE cotton further eroded by over 680 points for the week ended 20th March. This negative closing for the week follows the 4% lower settlement, a week prior. ICE cotton futures hit their lowest level in more than 10 years on Friday, as slowing business activities across the globe due to the coronavirus pandemic heightened fears of sluggish demand for the natural fiber.

This is the 2nd week of the cotton market under sellers’ control. In its update for the week ended 17th March, the CFTC showed Cotton speculative traders were 12, 465 contracts short as compared to 7,946 contracts short in the previous week. According to the weekly CFTC report, managed money gave up 4899 contracts in long position. The open interest stood at 267,040 contracts, up 9916 contracts.

On Friday, Cotton contracts for May fell 130 points to 53.63 cents per lb. It traded within a range of 53.20 and 56.35 cents a lb. July Cotton closed at 53.75 cents, down 123 points. The May-July spread squeezed further to 12 points, down from the spread last week at 27 points.

The contract has fallen 11.3% this week, registering its worst weekly fall since July 2011. The contract ended negative, despite excellent export sales. Concern about demand for cotton goods is an issue along with weak stock market.

The active contract on ICE has now lost 26.5% since posting a high of 73.08 cents in roughly 2 months’ time.

The week was painted in red right from 16th March, as Cotton futures gave up 153 to 169 points by the session closing. All ICE contract months traded at sub-60 cents level.

Cotton #2 slid to a more than six-month low on Monday on fears of the economic fallout from the coronavirus, while the U.S. Federal Reserve's second emergency rate cut failed to calm unnerved investors. Cotton contract for May fell 169 points to 58.80 cents per lb. The contract fell to 58.10 cents per lb earlier in the session, a level last seen in September 2019.

A sharp cut in interest rates by the Fed ahead of schedule and its pledge of massive asset purchases, infact, added to the alarm about the fast-spreading health crisis that has paralyzed supply chains and squeezed company revenue.

On Tuesday, ICE cotton futures slipped to a more than six-month low as a robust dollar and heavy rains in top cotton-producing state Texas kept the market reeling from the impact of coronavirus under pressure. Even the coronavirus scare took precedence over firm equities, as the Dow Jones opened positive in its trading session.

The fear of demand deterioration in China pushed cotton futures in to red, as Goldman Sachs estimated China's economy shrinking 9% in Q1 amid coronavirus outbreak. Cotton contract for May settled down 88 points at 57.92 cents per lb. Prices hit a low of 57.86 cents per lb, its lowest since August 2019.

"With the virus spreading beyond China, supply-side disruption to the textile industry in Vietnam presents a tail risk to U.S. exports for 2Q-3Q20," Goldman Sachs said in a note.

The massacre continued through mid-week, as Cotton futures finished with triple digit losses. Retail store closures and restricted traffic hurt the demand for textile goods. ICE cotton futures slumped on Wednesday to their lowest level in more than 10 years, as new cases of the coronavirus in Vietnam and a strong dollar marred investor interest in the natural fiber.

The heightened fears over the coronavirus sent the Dow Jones down some 2,000 points in the previous session. The coronavirus panic took the U.S. dollar over 200 basis points higher to close above par (100).It was, but, natural for the investors and traders to take refuge with USD.

Cotton contracts for May Cotton closed at 56.77 cents, down 115 points. Earlier in the session, it hit a low of 55.65 cents a lb, a level last seen in September 2009.

It is on Thursday that Cotton finished 171 to 221 points lower. The unexpected closure of Port of Houston sent the cotton market to limit-down. ICE cotton futures plunged to their lowest level in more than 10 years on Thursday, on fears of dwindling demand for the natural fiber due to the coronavirus and its impact on supply chains.

Cotton contracts for May settled down 171 points at 54.93 cents per lb. Earlier in the session, the contract traded limit down and hit its lowest since June 2009 at 53.64 cents.

And all of this happened amid yet another strong export-sales numbers. Cotton Export Sales totaled 419,176 RBs on the week ending 12th March. Of that, 340,692 RBs were 2019-20 and the remaining 78,484 RBs were new crop sales. USDA reported exports for that week at 369,544 RBs, which was 5.5% more than the same week in 2019. Accumulated cotton shipments rose to 7.840m RBs, compared to last year’s 6.346m RBs.

China accounted for 19.1% of the sales, with 61,589 RBs of old crop and 18,480 RBs of new crop. China has been the destination for 11.4% of the total cotton sales so far this year.

Traders noted that the shutdown of two terminals at Port Houston, Texas, added to concerns about cotton shipments.

Disruptions at Port Houston could have serious implications on shipping of the natural fiber from Texas, the biggest cotton growing region in the United States.

Port Houston said its Bayport and Barbours Cut container terminals have been closed and operations temporarily suspended after a person who worked at both sites tested positive for the coronavirus.

"The market is not able to find any support right now... People are expecting to see export sales go down in the coming days as there is less demand due to global shutdown of industries," said Bailey Thomen, cotton risk management associate with INTL FCStone.

According to economists, the global economy is already in a recession as the hit to economic activity from the coronavirus pandemic has become more widespread.

"Demand destruction is real... While there is also going to be some reduction in planted acreage, we don't see production dropping nearly as much as demand," British merchant Plexus Cotton said in a research note.

USDA had last week lowered its 2019/20 projection for U.S. cotton production by 300,000 bales to 19.8 million bales and also estimated lower demand globally, with a 1 million-bale cut in China's expected consumption.

USDA planting intentions will be issued next week on March 31. While experts anticipate reduction in acreage, production is not expected to drop as much as the demand.

With U.S. Cotton becoming cheaper, Fed’s efforts to keep the economy together through rate cut and pledge for massive asset purchases, experts hope for cotton markets to mark its bottom now. However, keeping an eye on stock markets performance is strongly advised.

Support and Resistance for Cotton #2 lies at 51.26 cents and 57.56 cents/lb, respectively.

(Commodities Control Bureau)

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