ZCE Cotton Rises To 9-Month High On Concern About Quality In China Reserve

MUMBAI (Commoditiescontrol) - China cotton futures rose fourth straight session on Thursday after posting biggest gain on previous session since November 2015 amid supply constraints and a sharp change in sentiment over what a liquidation of Chinese inventories will mean for the market.

Cotton futures on Zhengzhou Commodity Exchange (ZCE) gained 26.72 percent this month so far, while records gain of 14.57 percent this week so far.

Chinese officials last week announced to release up to 2 million metric tonnes of cotton from its reserves, between the start of May and the end of August, when the domestic harvest begins. Daily sales will be up to 30,000 tonnes, with prices based on international and domestic prices in the run up to the sale.

However market took a wild ride a day after the announcement amid probability that high quality fiber availability in reserve will be lesser as it has been stored for years.

The rise in prices were also supported by lower than expected crop in India. Further planting will be halted in Texas’s Coastal Bend region by rainfall as much six times the normal level over the next four days.

Other contributing factors include: 1) The delay of auction into May further tightens the outlook for near term supplies and therefore supported market. 2) Downstream mills are still in busy season entering into May and demand should increase. Also, import reserves are given priority in auction and sales are expected to be good if price is attractive. Experts already commented at China Cotton Futures Forum that cotton price will definitely move higher as long as we have a better-than-expected daily clearance.

Further USDA also trimmed its projection for global production by 1.1% to 99.8 million bales (480lb each, or about 218 kilograms). That would be a year-on-year decline of 16 percent, the biggest since at least 1961.

A cotton experts from Ahmedabad said "Chinese authorities intend to offer imported and higher quality cotton initially, but if large amounts of low-quality cotton do find their way onto the market, yarn spinners may still need to import cotton in order to blend with brittle, badly stored domestic supplies."

To meet the market demand, the total selling volumes of state reserved cotton and daily limit in 2015/16 season can be added, the National Development and Reform Commission (NDRC) stated on Wednesday.

The third month cotton futures on ZCE have strong hurdle at 13,640 yuan per tonne, a rise and close above may take prices towards next resistance level of 14,020-14,980, while strong support placed at 12,900 level.

However one should take notice of declining open interest and rising volume in ZCE futures. Open interest in third contract (September 2016) has fallen by 36 percent this week so far, while volume surged over 133 percent giving an indication that bearish are covering their short positions.

(By Commoditiescontrol Bureau; +91-22-40015533)