Indian Cotton Weekly: Winning Streak Vanishes amid Liquidation on US Market

MUMBAI(Commoditiescontrol):In physical trade, spot prices witnessed major fluctuations mainly tracing the cues from the global futures bourse throughout the week.

The market traded in the red zone three out of the five trading days of the week(Jan 1-5) and the weekly averages of the benchmark cotton variety dropped 0.5 to 0.7% across major markets. The only market which witnessed major loss was the Maharashtra cotton market plunging more than 1% during the week.

The domestic market was entirely following cues of the US cotton market whereby bears dominated the trend on major speculative long liquidation. The US cotton market trend has dominated the Indian cotton market since the beginning of December. Prices rose more than 9% throughout December after which lost 2% in beginning of 2018.

The core factor which has brought an upsurge in the global market is the drop in Indian cotton production to 35 million bales of 170kg from earlier bumper estimates of 40 million bales and shortage in premium variety cotton post the pink bollworm attack on the crop.

This shifted most buyers to US cotton market to procure to meet their near term requirements. The large export commitments at 14.1 million bales of 170kg(11.53 million bales of 480lb) and large on-call commitments of 19.8 million bales(15.43 million bales of 480lb) has captured the interest of speculators heavily investing into large long position raising US cotton prices to nearly 80 cents/lb on the ICE Futures exchange.

In competition, the Indian cotton prices also rose to near about 84 cents/lb(ex-gin) which speculated significant drop in exports this season. Yes, the Indian cotton export estimates would drop to 60 lakh bales(170kg) from initial estimates of 75 lakh bales in 2017/18 season however, the export levels is likely to remain close to 5 year average of 60 lakh bales.



Taking the Gujarat Shankar 6(30mm) as the benchmark, prices were in discount 5.2% to 83.59 cents/lb(ex-gin) compared to Cotlook Index A at 88.8 cents/lb. If we compared the CIF price of India cotton at 86 cents/lb then too we were still in discount by 3.15% to Cotlook Index A implying good export prospects.

Good enquiries from neighboring countries such as Bangladesh, Vietnam, China, Thailand, Indonesia and Pakistan have kept merchants on the forefront of the demand cycle this season. Nearly 60% of the total sold bales was accounted to exporters until December. As per trade sources nearly 25 lakh bales were committed as of date this season from which 15 lakh bales have been shipped.

On the supply side, cotton crop supply for the week(Jan 1-5) marginally lowered 8.7% to an estimated volume of 7.345 lakh bales compared to 8.045 lakh bales in the prior week(Dec 26-30) and was marginally lower 2.3% compared to same period last year at 7.515 lakh bales. Daily average arrivals were recorded 1.5 lakh bales.

The tightness in supply in the current season is soon resurfacing as farmers were withholding their produce in anticipation of better rates upwards of 5,500/quintal. The prevalent raw cotton rates were in the range of 4,300-5,500/quintal as of January 5. Over the year, the farmers have invested in increasing their inventory holding capacity hence the normal levels of 1.9-2.25 lakh bales is merely a dream in the years ahead.

Total new crop arrivals, since Oct 1, has reached 11.34 million bales(32.4% of total estimated production at 35 million bales), up 16% from same period in the previous year at 9.79 lakh bales.

One would argue that the daily cotton arrivals continued to lag behind the normal levels 1.9-2.25 lakh bales however if we look at the historical average whereby around 30% of the total crop should arrive by December, we are in a very much comfortable position from supply perspective.

INDIAN FUTURES MARKET:

The Indian cotton futures persisted sideways trend in the benchmark January contract as traders liquidated their long position during the week.

The benchmark January futures settled at 20,240/bale on Friday, lower Rs 30(0.1%) over the week. Open interest decreased 2 percent, over the week, at 8,476 lots(2.12 lakh bales of 170kg).



Technical Ideas(January): Traders long and holding the same can maintain a stop loss at 19,600 as higher level could attract resistance or profit booking. The C1 chart top is at 21,111 and resistance is seen at 20,230-20,510-21,060.

Correction and sideways volatility will resume on fall/close below 19,600.

Conclusion:

Taking the Gujarat S6(30mm) as the benchmark, the market breached the Rs 41,000/candy level during last week of December to record a highest level of Rs 41,700/candy on December 29. The bull driving force is accounted to trend on the US cotton market since early November.

Ignoring the global factors, the domestic fundamentals show comfortable position for both demand and supply, hence the market will continue to trend in the price range of Rs 39,000-43,000/candy.

However, the reality is that the US cotton market has become the benchmark for the global cotton market. The US cotton market will continue to feed on the bulls giving no major room for the bears to dominate going forth. This will keep Indian cotton market on a firm side hence the Rs 43,000/candy target is more achievable than Rs 39,000/candy unless Indian daily cotton arrivals rise to normal levels of Rs 1.9-2.2 lakh bales.

The bull steam in the global market is not likely to slow down anytime soon as global consumption is expected to increase 4 percent to 153 million bales of 170kg, despite a bumper global cotton production forecast at 153.4 million bales of 170kg as per the balance sheet drawn by USDA.

The US cotton market is the key indicator to the price trend going forward!



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