Cotton Weekly: US Market Rallies To 7 Month High

MUMBAI(Commoditiescontrol)- Aggressive MNCs buying in Indian market led to price rally in Indian cotton market while US cotton market strengthens for the seventh consecutive week on technical buying from speculators.

US MARKET:

The US cotton on the ICE futures persisted strength for the seventh consecutive week on major speculative buying during the past four weeks.

The benchmark March contract settled at 73.72 cents/lb on Friday, higher 0.6 percent over the week.

A sharp rally of 2 percent on Thursday took prices to 74.23 cents/lb, hitting 7 months high, breaching the previous of high during the dual hurricane phase on early September. The market ignored the large cancellation of exports at 105,800 Running Bales(RB) and closed higher. (Full Report)

The on-going rally was attracting speculators who were betting on long position as the open interest, as of December 7, showed a weekly growth of nearly 1 percent to 170,924 lots. However, as it usually happens post a sudden rally, prices closed to lower on Friday to 73.72 cents/lb, on possible profit booking.

Technically, the rally in the market was having ‘mini-pauses’ on the higher range as the stochastic indicator continues to trend in overbought zone indicating higher range should be used as resistance levels and the supply zone placed between 74.59-75.75 can attract profit booking.

However, the upward pull back persisting rally was more stronger than the minor profit booking on the higher range as prices tested new 7 month high this week.

The speculators were actively buying in the market as the rally in the ‘white gold’ was attracting them to invest in the market compared to other ag-commodities.



This is clearly evident in the latest CFTC report, dated December 5, during the period(Nov 14-Dec 5), Managed money players(Hedge fund) added a massive 96 percent to their net long position at 82,409 lots, where by the long only position increased 51 percent to 90,785 lots and shorts decreased 53 percent to a mere 8,376 lots.

Similarly, the non-commercials, categorized as speculators, raised net long position by 73 percent to 76,409 lots where long only position rose 44 percent to 95,133 lots and short only position reducing 15 percent to 18,724 lots.

Fueling fire in the minds of speculators could likely be the large on-call sales which rose 2.3 percent to 144,958 lots or 14.5 million 480lb bales(100%) with major share March to 55,986 lots(39%), May to 28,846 lots(20%) and July to 29,647 lots(20%).

While speculators have been accumulating longs, mills as well as other members of the trade are desperately hoping for an opportunity to get out of some short bets. The on-call commitments are used by merchants who short sell on the future market amid unfixed on-call commitments from mills.

The market has a sell-side liquidity problem, re-painting last season’s portrait. Speculators like the market’s strong performance and are adding to their net long, while the trade is desperately hoping for a break in order to get out of some shorts and/or to fix its over 11 million bales in current crop on-call sales.

Technical Ideas(March): Trendline breakout as been witnessed and bandwidth indicator is showing an upward bias which could lead price to test higher range of 74.63-76.81 with expectation of some volatility. Expect a near term rally to test last lower top peak of 75.75.

As previously mentioned that higher range could be used for profit booking as the stochastic indicator continues to trend in overbought zone indicating higher range should be used as resistance levels and the supply zone placed between 74.59-75.75 can attract profit booking.

Weaker opening and correction first to 72.58-71.70 can be used for buying with a stop loss
of 71.

CHINA FUTURES MARKET:

The ZCE Futures closed marginally higher however trades in consolidation at current levels.

The benchmark ZCE January futures settled at 15,420 yuan/tonne on Friday, higher 0.3 percent from Dec 1 amid 27 percent increase in open interest to 284,020 lots.

Fundamentally, ginners have stocked their inventories enough to meet their near term requirements however demand from local mills were limited due to sluggish textile sales.

The Chinese State Reserve Auction is scheduled to begin from March 12 onwards until August 31.

Technical Ideas(May): Consolidation is seen at current or lower levels. The strategy is to hold long position with stop loss of 14,870. Accumulate at 15,245-15,021 with stop loss at 14,870.

Resistance is seen at 15,600 which is the 61.8 percent retracement level hence higher range 15,531-15,786 is placed as a resistance zone and can attract profit booking. Further, the peak registered in September 2017 is 16,060 and the spike can lead prices to test 15,720 or 16,060 which is also another zone for profit booking.

INDIAN FUTURES MARKET:

The Indian cotton futures rallied to more than six-month high as traders resorted to aggressive short covering during the week.

The benchmark December futures settled at 19, 210/bale on Friday, higher Rs 360(2%) over the week. Open interest decreased 16.4 percent, over the week, at 4,691 lots(1.17 lakh bales of 170kg).

Technical Ideas(December): Expect higher range of 19,397-19,897 to be tested next week. Traders holding long position, can maintain a stop loss at 18,040.

Weaker opening and correction first to 19,083-18,897 can be used for buying with a stop loss of 18,040.

INDIAN SPOT MARKET:

In physical trade, spot prices gained for the second consecutive week on good demand from exporters and limited scale buying from local mills.

Weekly averages of the benchmark cotton variety in most markets surged Rs 650-850/candy or 1.8-2.2 percent.

The Cyclone Ockhi had some effect on the market early in the week surging spot prices on Monday however those concerns dissipated as the cyclone weakened into a depression and faded away, with little impact of moderate to light rain showers. The cyclone did effect daily arrivals apart from that there was nothing extravagant.

Renewed demand from leading MNCs, were aggressively purchasing to replenish their inventories amid delayed shipments. Most of the purchases were of average quality cotton from Maharashtra in the price range of Rs 33,000-36,000/candy, mainly exported to Bangladesh.

There were some premium quality lint purchases from Gujarat and Madhya Pradesh however MNCs and also local mills were facing difficulties to source premium variety cotton on a large scale, as the recent Pink Boll Worm(PBW) ate some of the premium variety cotton share for the season.

Further, local mills, especially in south India, turned active to bidding for good quality(29mm) cotton from Maharashtra, Gujarat and South India, in order to replenish their empty inventories amid expectation of revival in demand in the yarn market in the weeks ahead. Most local spinners refrained from bidding huge lot deals due to shortage of quality lint in the market and liquidity issues on aftermath of GST.

Just when the world largest producer was expecting bumper production of 38-40 million bales(170kg each), The Pink Boll Worm(PBW) incidence demolished high hopes, affecting key producing regions, namely, Maharashtra, Andhra Pradesh, Telangana and Karnataka.

Due to the PBW, surety of drop in yield and quality deterioration will play the devil’s role this season in the industry, with decline in production, exports and probable sourcing good quality cotton through imports in the latter end of the season. However, the extend of loss in Maharashtra is under the fog and it would clear out post December 15 or December 25, depending on when 70 percent crop has been harvested. (Full Report)

Despite increase in cotton planting area to 122 lakh ha, yield is expected to drop this season to an estimate of 510 kg/ha from previous season at 560 kg/ha. This takes the production approximately at 36 million bales from the prior estimates of 37.5 million bales. Thus, taking the ending stock at 4.1 million bales which is enough carryover for next season.

However, the market would focus on the quality of the cotton arriving in the market and this would be determined post December 25, when the Maharashtra area would be surveyed by experts.

Cotton crop supply for the week(Dec 4-8) marginally dropped 4 percent to an estimated volume of 8 lakh bales compared to 8.345 lakh bales in the prior week(Nov 27-Dec 1) and was higher 7 percent compared to same period last year at 7.48 lakh bales. Supply in 2016/17 was gradually returning to normalcy after ginners resorted to digital payments post demonteziation.

Total new crop arrivals till date has reached 75.83 lakh bales, up 24 percent from same period in the previous year at 61.14 lakh bales. The figures include arrivals during the month of September as well.

Farmer were selling their good quality produce at good rates ranging between Rs 4,000-4,900/quintal however amidst the speculation of shortage in premium variety lint, farmers in South India and Maharashtra have resorted to reserve premium variety cotton in hopes of achieving better than prevailing rates in the season, upwards of Rs 5,000/quintal.

Conclusion:

The Indian cotton prices continues to trend in the set range of Rs 37,000-39,000/candy since the month of October however, the recent renewal in demand has tilted the trend upwards.

As previously mentioned, the demand side industrial players were living on an empty pipeline, eager to get their hands on premium variety cotton as and when it is available. Export prospects may remain in the levels seen last season at 60 lakh bales on average and 65 lakh bales at the most.

The prevailing rates were in parity for exports however the industry was lacking quality cotton which could likely be delayed until new year 2018. Bangladesh is aggressively purchasing Indian average quality cotton, while demand from other countries were below average.

China is expected to enter the market from beginning of 2018 and the recent large cancellation from US at 44,600RB (58,767 bales of 170kg each), could shift demand to India in the new year, if the market trends in the present levels of 74-77 cents/lb.

Further, the country has just received 20 percent of the total estimated production 36 million bales. Unless the veil over the Maharashtra crop is lifted, till then domestic cotton price will trend in the range of Rs 37,000-39,000/candy. Quality will be the main price trend driver this season in India.



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