Cotton Weekly: Market Trending In Oversold Levels

MUMBAI (Commoditiescontrol)- Major sell off pushed US cotton prices around the 10 month low while Indian cotton price fell to levels last observed in February.

US MARKET:

Major sell off in the US cotton market tumbled the December cotton prices on ICE futures by 234 points to settle at 67.02 cents/lb on Friday while July gained 77 point to end the final trading session at 72.65 cents/lb ahead first notice day on June 26.




The market shrugged off incurring 10 session losing streak falling below key support levels at 70 cents/lb. Further, rising open interest amid the losing streak indicated aggressive short selling up until Tuesday, when open interest rose to 160,315 lots. However, trade short were not the only reason behind the drop in prices, as first wave of speculative long liquidation pressured prices on Thursday.

It seems speculators were driven by technical indicators, completely ignoring the robust export sales report on Thursday. Since May 15, which was the previous high at 75.15 cents/lb, prices have nosedived 882 points to 66.33 cents/lb with a straight blood spill downward trend drawn on the technical chart.

The USDA weekly exports showed robust demand for old crop, as new sales witnessed a sharp surge to 177,000 Running Bales (RB) while the new crop sales combined (upland and pima) surged sharply 475,300 RB from previous week’s 200,678 RB for the week ending June 15. Total old crop commitments touched 14.73 million running bales (15.13 million 480lb bales) and new crop commitments reached 3.88 million running bales (4.10 million 480lb bales). (Full Report)

Considering the lower ending stock and the rise in certified stocks to 490,897 bales, if there were less purchasers and then these stocks could be used to meet August onward export commitments. The bears need to keep a close eye on the notice period of July which begins from June 26.

The USDA’s annual acreage report is due on the June 30 which will give clear picture of the final estimated acreage with many traders predicting a 12 million hectares estimation or around the similar levels. The USDA prospective planting raised all cotton planting area by 21 percent to 12.2 million hectares for 2017-18 in the March 31 annual report.

The market is in technical oversold conditions and likely to witness a minor rebound however next week’s acreage report would give fresh cues to with bets placed on the bear trend to persist.

CHINA MARKET:

The ZCE cotton futures trended sideways with the benchmark September contract hovering around the 6 month low.

The benchmark September contract settled at 15,215 yuan/tonne on Friday, marginally higher 0.3 percent over the week.

Open Interest as of June 22 showed a drop of 7.5 percent to 206,056 lots compared to same period last Friday.

China’s cotton acreage in 2017 is likely to increase 8.5% y/y to 4.75 million hectares, output is expected to rise 5% y/y to 5.37 million tonnes as rising cotton prices have encouraged farmers to grow more of the crop, according to latest survey published by the China National Cotton Information Center on Wednesday.

Meanwhile, the State Reserve auctioned a total of 148,661 tonnes from which it sold 87,554 tonnes for the week ended June 23 touching a weekly turnover at 59 percent. Since the commencement, around 1,598,735 tonnes (94.04 lakh 170 kg bales) were sold from the total offered quantity of 2,319,460 tons (136.43 lakh bales). (Full Report)

INDIAN MARKET:

The Indian cotton futures persistently showed a bearish pattern for third consecutive week as the benchmark July plunged 3 percent over the week to the lowest level observed since contract commencement.

The July contract on the MCX futures plunged Rs 630 to Rs 19,840/bale over the week on Friday amid sharp rise of 31 percent to 5,682 lots(1.42 lakh 170kg bales) indicating aggressive short selling by speculators on bearish market sentiment.

The market is trending in oversold conditions with likelihood of a technical rebound from support levels.

Technically, the bandwidth is rising amid price fall indicating a downside trend being drawn on the technical chart for the July contract. Relative Strength Index has fallen to 39.70 in the oversold territory with likelihood for a rebound from support gap at Rs 19,550-19,340. Support for the week is placed at Rs 19,510 and Rs 18,610 while resistance is observed at Rs 20,410 and Rs 21,310. (Technical Report)




DOMESTIC SPOT MARKET:

Downtrend persisted for the third consecutive week wiping off early week gains as spot price plunged to the levels observed during the last week of February, ranging between Rs 42,290-44,270/candy, taking all superior quality varieties as benchmark.




Major impact was observed on Gujarat Shankar 6 30mm cotton where prices tumbled Rs 620 to Rs 42,990/candy compared to prior week average of Rs 43,610/candy.

Meanwhile, some tight selling in the Maharashtra market supported price witnessing a marginal decline of Rs 70 to an average weekly price of Rs 43,590/candy.

Downtrend was ruled by the bearish pattern observed on the global futures exchange for the third consecutive week amid expectation of higher production across top producing countries in 2017/18 season.

Further, standstill situation in the physical trade market over complications on GST supported the on-going dull sentiment in the market which may likely last until commencement of new tax reform(GST) beginning from midnight of June 30.

The old crop supply was gradually depleting as expected and as per the data collated from market sources, arrivals for the week (June 19-23) declined 11.4 percent to fall below the 1 lakh bales mark to 94,100 bales of 170kg from 1.06 lakh bales in the week prior (June 12-16) with the average daily arrivals falling to 18,800 bales from 21,200 bales.

The total supply figures of old crop touched 32.46 million 170kg bales which was 95.3 percent of the estimated target 34.05 million bales as of June 19 according to Cotton Corporation of India (CCI). (Full Report)

Meanwhile, new crop planting hit a roadblock in various growing regions of Central India due to delayed monsoon with merely scattered rainfall received during this week. Many farmers who were eager to begin sowing have opted to wait until normal rains arrive while the early sown seed cotton was in desperate need of rains in order to avoid the nuisance of re-sowing.

The new crop planting progress showed that around 24.70 lakh ha has been covered as of June 22, higher 34 percent from previous year’s 19.07 lakh ha, however lagged 27.4 percent to the 5-year normal area average of corresponding week at 34.03 lakh ha. (Full Report)

Favourable conditions are likely to develop for further advance of southwest monsoon into remaining parts of Madhya Maharashtra, Marathwada Vidarbha, some more parts of East Madhya Pradesh, remaining parts of Bihar and some parts of West Madhya Pradesh and East Uttar Pradesh during next 3 -4 days according to Indian Met Department. Further, expect fairly widespread to scattered rainfall in the next 5 days.

Cotton shipments rose 30 percent in the month of May to 6.21 lakh bales taking the total export for this season to nearly 60 lakh bales on higher demand between January to mid-March. (Full Report)

Conclusion:

Indian cotton prices have fallen to the levels seen last in the month of February and fundamentally demand has been lackluster since past two months. Many local spinning mills were running on a hand to mouth basis and we could see a revival in demand in early July as doubts are gradually cleared after the country enters new tax realm from midnight of June 30.




Further, 60 lakh bales have been already exported as of May with probability of total export touching 65 lakh bales, on likelihood of some delayed commitments to be fulfilled in the remaining 4 months of the 2016-17 season, which pulls ending stock revised downward to 36 lakh bales reaching the same level observed in 2015-16 season.

Though the balance sheet is showing a tight ending stock, expectation of higher production, in 2017/18, likely ranging between 350-360 lakh bales amid favorable weather conditions, higher world ending stock and competitive world basis is likely to limit major uptrend in cotton prices on fundamental point of view.

At present, Indian cotton prices were gaining influence from the long standing bearish trend of the US cotton market and further downfall could be expected if it continued to pursue the current trend.

We place long term resistance on cotton spot price at Rs 45,500/candy(benchmark Guj S6) while the near term stands at Rs 44,000/candy.

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