MUMBAI (Commoditiescontrol) – A huge volatility was witnessed in domestic cotton market during the week after consistent one sided rally since April as higher prices faded demand for the white gold by the mills. The natural fibre lost its appetite among the industry players and corrected over 4.5 percent this week ended Saturday.
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The primary reason that hurt the cotton prices were its competitiveness in yarn and garments that has prompted mills to stay sideline or slowdown consumption by going on production holiday to reduce losses as off take in finished products was not so great as was in raw material.
India cotton during the last couple of years mostly remained 30 cents discount with China and which has now narrowed to less than 10 cents are likely to hurt exports competitiveness in the global market.
According to commoditiescontrol compiled data cotton (S-6 Gujarat, 29MM (3.8+micronaire) prices since April rose so far above 43 percent, while yarn (40’s count Ahmedabad) spurt only by half i.e. 20 percent.
It will be very difficult for mills to survive under such circumstances, especially for medium or small scale industries, while the financial sound mills with better inventory may have enjoyed the current rally.
However it is very tough situation for industry as whole as higher cotton prices has made domestic finished products uncompetitive in the international and hence domestic cotton prices should fall in order to maintain the export share in the global market, otherwise countries like China, Vietnam, Bangladesh will get benefit, especially China, sitting with huge cotton, while other countries are struggling due to lower cotton availability.
The impact of higher prices has already been started to reflect in term of consumption as many spinning mills have opted to reduce production shift and by shutting down mills for 1-2 day per week. According to trade experts domestic cotton consumption is likely to drift lower by 15-30 percent.
Lower consumption with favorable crop in the country except in Gujarat and North, where some instance of pink bollworm and Whitefly attack has been noticed, is likely to weigh on prices sooner or later.
India Cotton Premium To Cotlook
India cotton is currently premium over ‘Cotlook Index A’ and to get competitive in the global market prices should correct. India cotton at present is more than 2 percent premium over Cotlook. The below chart also clearly indicates that usually India cotton prices remain discount to Cotlook, and premium over it will hurt India textile and garments export competitiveness in the global market.
Projected Domestic Supply-Demand For Aug-Sept 2016
Unsold Stock (CCI-MNC’s-Pvt Traders) : 18 Lakh Bales
Inventory With Mills: 30 Lakh Bales
Expected Import In August-September: 8 Lakh Bales
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Total Supply: 56 Lakh Bales
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Domestic Consumption August-September (P): 40 Lakh Bales
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Ending Stock (P): 16 Lakh Bales
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The projected domestic supply-demand for the next couple of month indicate smooth supply-demand balance sheet, however ending stocks of 16 lakh bales, it lowest in a decade.
Cotton Sowing Pick Up; Deficit Narrowing With Clear Weather
Cotton sowing in the country has picked up in the last couple of week. Earlier by June-end cotton cultivation data showed that acreage falling sharply behind last year, but good rainfall early this month followed by favorable climate for sowing helped famers to accelerate sowing process.
The recent data released by ministry of agriculture revealed that cotton has been planted in 86.86 lakh hectares as on July 21 from 99.52 lakh hectares same period a year ago. (Full Report)
Global Cotton Market
Bullish trend continued in China cotton market, while U.S market has shown some respite at the higher level amid profit booking and better than expected cotton crop progress report.
China state reserve continued to dominate local sales as it has auctioned 100 percent cotton put for sale during the past 19 session ending on July 22. State reserve sold around 1.45 million bales so far this season from target of 2 million bales, which starts from May 3, which is 98.61 percent of total cotton put for auction.
The global market rally was mostly speculative, and mainly driven by China as open interest between June 15 to early July doubled, which was later on followed by India and U.S. China is sitting with huge stock pile, while availability was tight in India & U.S.
Plexus cotton in a note said “73 cents futures means that US high grades are now priced in the mid-80s landed Far East, which may still be on the cheap side when compared to the 90+ cents in India and 100+ cents in China. But we feel that both Chinese and Indian prices will eventually come under pressure as we approach harvest and that US prices should therefore no longer have to play catch up.”
Speculators and weather scares have the power to move prices temporarily higher, but for now we are sticking to our 68-76 cents trading range, it said.
Open Interest Analysis Of Top Three Cotton Producer
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Analyzing open interest of top three cotton producing countries (U.S-China-India), we have come to the conclusion that speculators are trimming positions in China market after parabolic recent rise and creating long position in U.S market. U.S cotton is around 18 cent discount to China and 16 cents to India.
Open interest in U.S during week ended July 22 has dropped just 1 percent, while prices reacted over 2 percent. Prices and open interest in China market fell nearly 5 percent and 7 percent respectively, while open interest plunged over 16 percent followed by over 7 percent fall witnessed in India.
Conclusion
There are lot of uncertainties likely to keep cotton market volatile due to lack of clarity about crop in India and China. It is very difficult to predict about the price at the current juncture, but the fundamentals, followed by open interest analysis suggest that some correction could be seen next week.
(By Commoditiescontrol Bureau; +91-22-40015533)
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