Cotton Weekly: Indian Market Rallies on Good Demand However Will The Rally Sustain?

MUMBAI(Commoditiescontrol)- Indian cotton market rallied for the third consecutive week on good demand from local mills and MNCs. US cotton futures surged for the eight consecutive week on speculative buying.

US MARKET:

The US cotton on the ICE futures persisted strength for the eight consecutive week as spec buying and bullish options strategies by the trade continue to feed this bull move.

The benchmark March contract settled at 75.92 cents/lb, hitting a new contract high on Friday. Amongst the eight weeks, this would be the most explosive bull run as prices were higher 3 percent over the week.

The story remains the same, with the market still facing sell-side liquidity, repainting last season’s scenario of tug of war between trade shorts and spec long. The specs have been aggressive in the past one month adding nearly 87 percent to their net long position.

Fundamentally, market focused on the 4 percent, y/y, increase in the world demand figures to 119.59 million bales in the USDA World Agricultural Supply Demand Estimates(WASDE), the rise in export demand and large on-call commitments.

These were the fundamental factors which fueled bull rally during the week. Speculators continued to add to their long position since November 14, and after the prices breached the 200 day Moving average on November 20.



This is clearly evident in the latest CFTC report, dated December 12, during the period(Nov 14-Dec 12), Managed money players(Hedge fund) added a massive 113 percent to their net long position at 89,510 lots, where by the long only position increased 60 percent to 96,147 lots and shorts decreased 63 percent to a mere 6,637 lots.

Similarly, the non-commercials, categorized as speculators, raised net long position by 87 percent to 82,602 lots where long only position rose 50 percent to 99,654 lots and short only position reducing 22 percent to 17,052 lots.

The large on-call sales rose 1.7 percent to 147,484 lots or 14.75 million 480lb bales(100%) with major share March to 55,815 lots(38%), May to 29,730 lots(20%) and July to 30,742 lots(21%). In the period of one month, the on-call sales almost reached to similar levels as seen on November 17, covering for most of the decline caused by fixation in December.

For March fixations this means that with 44 sessions to go until First Notice Day, mills, will on average, have to fix around 127,000 bales per day or about 1270 contracts. That adds up to a lot of support!

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 77.53-81.52 with expectation of some volatility.

CHINA FUTURES MARKET:

The ZCE Futures closed lower on long liquidation over the week.

The benchmark ZCE January futures settled at 15,085 yuan/tonne on Friday, down 2.2 percent from Dec 8 amid 8.3 percent drop in open interest to 260,492 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): The chart recorded a bearish candle amid 2.2 percent drop in prices over the week indicating that selling pressure is dominant at current levels unless a recovery as seen during Dec 4-8 is witnessed next week.

The oversold stochastics is an indication of potential recovery from support levels at 14,897-14,870 and a pullback to weekly resistance levels 15,188-15,377-15,500.

The objective remains to exit long position if prices rise to 15,188-15,377 however if the rally persist to breach key resistance level of 15,500 then hold long position as an upward trend could persist upon breaching key resistance.

However, a breakdown and downside momentum towards 14,650 could be possible if prices fall and close below 14,870.

Until then expect sideways volatility between the band of 14,870-15,500.

INDIAN FUTURES MARKET:

The Indian cotton futures rallied to record a new contract high in January contract as traders raised their long position during the week.

The benchmark January futures settled at 19,970/bale on Friday, higher Rs 550(3%) over the week. Open interest increased 24.24 percent, over the week, at 5,884 lots(1.47 lakh bales of 170kg).

Speculators were opening a fresh long position in January contract and some even shifted their position from front month December. The open interest in December dropped 17.4 percent to 3,874 lots(0.97 lakh bales of 170kg)



Technical Ideas(January): Major addition of long position was witnessed during the week which raised prices to new contract high and recorded a bullish candle. Hence, expect higher range to be tested. Resistance is seen between 20,230-20,960.

Stochastics is trending in overbought zone which could bring minor correction in the form of profit booking. However, The RSI and MACD were moving higher which is supporting upward trend.

Weaker opening and correction first to 19,760-19,500 can be used for buying with a stop loss of 19,200.

INDIAN SPOT MARKET:

In physical trade, spot prices gained for the third consecutive week on good demand from exporters, spinning mills and sharp surge on the global futures exchange.

Tentatively, weekly averages of the benchmark cotton variety surged more than 3 percent or Rs 1,200/candy in Maharashtra and all markets of South India. Meanwhile, North India surged 1.5 percent or Rs 500/candy and nearly 2 percent or Rs 750/candy across Gujarat and Madhya Pradesh.

The market was on a one-sided upward trend as the sentiment turned bullish amid good demand for quality cotton from buyers. Most buyers were actively covering their requirements on fear of shortage in quality lint and higher than anticipated rates later in the 2017/18 season.

Good demand in the yarn market has supported buying sentiment of local spinning mills. The yarn rates increased nearly 9 percent across Coimbatore and 11 percent across Ichalkaranji within two weeks. Taking the benchmark 60s carded weft at Coimbatore, prices rose 9 percent to Rs 240/kg while 60s combed compact at Ichalkaranji rose 11 percent to Rs 302/kg.

MNCs who deal in exports persisted bales procurement to replenish their inventories of premium variety cotton amid good demand from neighboring countries such as Bangladesh, Pakistan and limited scale buying from China.

Further, the US cotton futures benchmark March contract hit a new high at 75.92/cents/lb on Friday, up 3 percent on speculative buying during the week. The Cotlook Index A rose 1.4 percent over the week to 85.9 cents/lb. The surge on US cotton market and other benchmark cotton index, kept an upbeat sentiment in the domestic market influencing rise in cotton prices.

Cotton crop supply for the week(Dec 11-15) dropped 12.7 percent to an estimated volume of 6.98 lakh bales compared to 8 lakh bales in the prior week(Dec 4-8) however was higher 12 percent compared to same period last year at 6.235 lakh bales. Supply in 2016/17 was gradually returning to normalcy after ginners resorted to digital payments post demonetization.

Supply during the current week dropped due to one-day strike against Reverse Charge Mechanism(RCM) by ginners across Maharashtra, Madhya Pradesh and South India on Friday, December 15. Daily arrivals on Friday dropped to 65,000 bales from normal levels of 1.6-1.7 lakh bales.

The Cotton Association of India(CAI) has called for an indefinite strike from December 22 onwards if the GST council fails to solve the RCM related issues faced the cotton industry, mainly, ginning and oil mill industry in the meeting held on December 21. (Full Report)

Total new crop arrivals till date has reached 85.89 lakh bales, up 25 percent from same period in the previous year at 68.88 lakh bales. The figures include arrivals during the month of September as well. The Total arrival, from the beginning of the season on Oct 1, reached 81.86 lakh bales, up 31.3 percent from 2016/17 season at 62.38 lakh bales.

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 upward trend on Indian cotton market has breached the near term resistance of Rs 39,000/candy and is heading towards Rs 40,000/candy. The upward trend is mainly on renewed demand as previously predicted despite normal levels of daily cotton arrivals at 1.7 lakh bales.

The market seems to be believe that the production forecast from reputed government agencies ranging between 37-38 million bales is far from true and trade sources anticipate production to drop 35 million bales at the lowest level and 37 million bales at the highest level.

However, production will remain higher than last season and if we take the lowest trade estimate at 35 million bales, around 23 percent of the total crop has arrived which leaves 77 percent of the total crop left to arrive in the market in the next 10 months and half month of December of the 2017/18 season.

If we look from the supply perspective that is a huge crop left to arrive in the market. The question remains is that whether the market trends on the quality issues or will supply dominate keeping the bull steam limited!

The beginning of 2018 will lift the veil over the availability of premium variety cotton and the key support on cotton prices has shifted from Rs 37,000 to Rs 38,000/candy.



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