Cotton Weekly: Market Loses Firepower as Bearish Cues Prevail!

MUMBAI(Commoditiescontrol)- Indian cotton market declined on lethargic trade activity amid bearish cues weighing on prices while the US cotton market witnessed orderly squaring off by long and short positioned market participants pushing ICE futures below the first support level to settle at 75.69 cents/lb.

US MARKET:

The ICE old crop July futures fell nearly 1.3 percent to settle at 75.69 cents breaching the first support level at 76.17 cents/lb.




Judging by the major fall in price, since the prodigious bull run took prices to a 3 year high at 87.18 cents/lb, it seems that speculators have thrown in the towel and were liquidating in an orderly manner.

Open interest, last recorded on Thursday, plunged 51 percent to 63,994 lots since May 15 indicating aggressive liquidation. Further, contributing to the fall were the trade shorts who were gradually seizing the opportunity and squaring off their position which was supporting prices above the key support level at 75.35 cents/lb.

The trade shorts were attributed to the large outstanding on call commitments which was gradually declining since May 15. As of June 2, July on call position decreased 6,490 lots to 24,560 lots (2.46 million 480lb bales) and there may have been further decline during this week(June 5-9).

With nearly 10 sessions remaining until the first notice day of July contract, mills may have to aggressively square off the outstanding 1.8-2 million bales, after estimating this week’s reduction in on-call commitments, which would likely provide tremendous support to prices.

The market has lost the last remaining support, after the USDA export sales report which showed a subpar performance plunging 19 percent week on week at 92,100 Running Bales of 2016-17 crop. (Full Report)

Surprisingly, the USDA did not revise the old crop exports figures and kept it unchanged at 14.5 million 480lb bales in the June World Agricultural Supply Demand Estimates(WASDE). (Full Report)

Further, observing the low intraday volume during the major index fund roll period, it seems that major index fund have rolled over their position during the first week of June. The Goldman Sachs index fund roll over commenced on June 7 and the market was void of enthusiasm. The total intraday volume was the lowest for the first day of the roll at 28,342 lots compared to 73,616 contracts on the first day of the roll in April, 84,127 contracts in February, and 62,970 contracts a year ago. Further, there was nothing competing enough in the intraday volume of following days.

As the notice period draws near, we may observe volatility in prices on orderly squaring off by the remaining spec long and trade shorts in the market. July is trending below the 100 day Simple Moving Average (SMA) at 77.73 cents/lb and may likely continue below for the next few trading session along with key resistance 79.87 cents/lb.

CHINA MARKET:

The ZCE cotton futures moved higher on major short covering after prices fell to 22 week low.

The benchmark September contract hit a 22 week low settling at 15,315 yuan/tonne on aggressive short selling at the beginning of the week where the open interest rose 8 percent intraday to 252,434 lots.

However, as the week progressed, short covering from speculators pulled back price to settle at 15,515 yuan/tonne. Open interest during this period declined 18,616 lots to 233,818 lots as of Thursday.

Prices further rose to settle at 15,620 yuan/tonne hitting a 6 session high on Friday.

Meanwhile, the State Reserve auctioned a total of 148,685 tonnes from which it sold 98,199 tonnes for the week ended June 9 touching a weekly turnover at 66 percent. Around 1,419,987 tons (83.53 lakh 170 kg bales) were sold from the total offered quantity of 2,020,573 tons (118.86 lakh bales of 170kg). (Full Report)

INDIAN MARKET:

The Indian cotton futures exhibited a bearish trend on major long liquidation and ending the week on some short covering to settle at Rs 20,740/bale on the benchmark June contract.

The June contract on the MCX futures fell to a 5 month low at Rs 20,630/bale on June 7 on major long liquidation amid bearish cues in the spot market and downward trend on the ICE futures.

Open Interest fell 17 percent to 4,839 lots (1.21 lakh 170kg bales) amid prices plunging Rs 780 or 3.3 percent to Rs 20,610/bale amid speculators liquidation.

However, the technical chart since March showed a sideways trend as the Daily Reversal Value (DRV) is around Rs 20,600 since March 2017 on the weekly chart, so we have 11 weeks of sideways movement up until now. No major directional movement was observed implying that any positional trade long or short may not yield substantial desired result. (Technical Report)

We recommend to sell on rise of Rs 20,900 and above as the opportunity arises. Support for the week is placed at Rs 20,577 and Rs 20,247 while resistance is observed at Rs 20,907 and Rs 21,237.




DOMESTIC SPOT MARKET:

The domestic market was void of trade activity during the entire week post GST announcement with prices mostly trading sideways in major markets of Central and South India while North India witnessed volatility tracking the futures market trend.




The Gujarat Shankar 6 30mm cotton marginally lowered 0.6 percent or Rs 280 to Rs 43,890/candy compared to Rs 44,170/candy in the prior week. Meanwhile, the Maharashtra 30mm was down 0.3 percent or Rs 130 to average at Rs 43,860/candy from Rs 43,990/candy in the previous week.

Bearish trend on the futures exchange influenced spot prices with major impact observed in the markets of North India where prices plunged to a 1 month low on June 7 ranging between Rs 4,545-4,650/maund(43,380-44,380/candy) followed by a minor recovery to a 1 week high ranging between Rs 4,595-4,685/maund(43,800-44,720/candy) tracking the short covering on the futures exchange on Friday.

Fundamentally, the market was lacking enthusiasm as major domestic spinning mills restricted procuring cotton bales mainly due to slack sales in the yarn market over confusion on manmade yarn GST.

The GST council announced the final tax rates on the textile sector on June 3 ranging from 5 percent on cotton fibre, yarn and fabric products while apparel costing below Rs 1,000 was also including in the bracket and apparel costing above Rs 1,000 would levy 12 percent GST. Manmade fabrics and yarn products would levy a hefty 18 percent GST.

The textile sector welcomed the GST rates stating that it would bring about tremendous growth and transparency to the suffering industry. However, confusion hovered over the GST levied on the manmade fabrics and yarn that if the fibre contained 50 percent cotton and 50 percent manmade fibre then whether the final GST levied would be 18 percent or the 5 percent as levied on cotton and cotton yarn.

The market participants adopted a wait and watch approach on further clarity on the GST rates as yarn prices extended steady trend throughout the week. The benchmark 60s carded weft was quoted between Rs 226-248/kg in the market of Coimbatore. (Full Price List)

On the old crop arrival side, as per the data collated from market sources, arrivals for the week (June 5-9) plunged 25 percent to 1.12 lakh bales from 1.50 lakh bales in the week prior (May 29-June 2) with the average daily arrivals falling to 22,300 bales from 30,000 bales.

Meanwhile, the prospects of the 2017-18 crop was showing positive growth with many regions increasing their sowing area on account of lucrative prices received by farmers in the 2016-17 season. The crop planting progress was well ahead by 42.4 percent at 14.06 lakh hectares planted as of June 8 compared to 9.88 lakh hectares planted last year. Some regions were lagging behind in comparison to the normal area planted however its was nothing debatable. (Full Report)

Conclusion:




Bearish cues, such as rise in sowing acreage amid good rainfall, large unsold stock with ginners and spinning mills, were in place restricting an upward trend on the domestic spot price. The estimated 2016-17 balance sheet was drawn by our team was showing a large ending stock at 43 lakh bales.

We estimated a slightly lower production at 330 lakh bales and revised imports higher at 32 lakh bales. Consumption is seen at 295 lakh bales and export at 60 lakh bales from which 53 lakh bales have been shipped as of April. This would leave ending stock at 43 lakh bales and considering that the estimated 2017-18 production could range between 350-358 lakh bales, as per USDA and ICAC, the total supply could likely be around 390-395 lakh bales excluding imports.

Fundamentally, the above factors could likely pull back prices to the levels seen during the beginning of the 2015-16 ranging between Rs 33,000-35,000/candy.

The price chart showed that spot prices have fallen back to the levels seen in March and we believe that the upside in cotton prices reaching the levels of Rs 47,000-50,000/candy is now a mere dream.

(By Commoditiescontrol Bureau; +91-22-40015534)