Mumbai, 12 NOV (Commoditiescontrol): ICE cotton futures piled on previous week's rally, helped by a weaker U.S. dollar and strong demand prospects after top consumer China eased some of its COVID restrictions. On Friday, the natural fibre added more than 1.4% and clocked their back to back second weekly rise.
ICE cotton contract for December closed at 88.20 cents, up 1.82 cents, March 2023 finished at 86.33 cents, up 1.77 cents and July 2023 settled at 84.87 cents, 1.53 cents higher; estimated volume was 53,883 contracts.
Spot December's option expired on Friday. For the week, December cotton rose 1.27 cents, for the month it is up 16.20 cents, but for the year it is off some 4.45 cents.
Spreading dominated a lot of the action, as the Dec/July spread went from 25 points carry on October 28 to a 333-point inversion Friday, while the Dec’22/Dec’23 inversion widened by 703 points, going from 95 points to 798 points. In other words, December has been the locomotive that pulled the rest of the board along. This signifies, the rally was a function of speculative ‘bear trap’ rather than supply woes. If the latter was the case, then July would have marched in lockstep with December.
Prices were supported by a motley of factors, including a weaker dollar, some crop loss from tropical storm Nicole, and eased COVID restrictions in China.
The dollar fell across the board for a second straight day, making U.S. cotton cheaper for holders of other currencies to buy.
China eased some of its strict COVID rules, including shortening quarantines by two days for close contacts of infected people and for inbound travelers.
Meanwhile, a jump in prices of oil and industrial metal and an upbeat sentiment in wider financial markets also seeped into the natural fiber. Higher oil prices make polyester, a substitute for cotton, more expensive.
On Wednesday, December contract slipped 1.4%, snapping a six session winning streak after the U.S. Department of Agriculture (USDA) in its monthly report showed bigger-than-expected U.S. production and lower global demand estimates.
The WASDE report gave both camps something to gripe about, as the bulls didn’t seem to agree with the 14.03 million US crop number, while the bears were scratching their heads about the still too optimistic mill use number, which at 114.95 million bales is simply not rooted in reality.
The USDA has global mill use just 2.4% down from last season’s 117.4 million bales, but many mills in key consuming market keep telling us that they have been running 20% or more below their usual output since June, with no immediate improvement in sight.
A back-of-the-envelope calculation gives us at least an 8-10 million bale drop in mill use compared to last season, but if economic conditions won’t improve anytime soon, the contraction will get a lot worse.
Further, the weekly export sales were somewhat weaker, but Thursday's softer-than-expected CPI report did bearishly break the U.S.
dollar. Some traders are now thinking the Federal Reserve's fight with inflation may have reached a serious inflection point, although some board governors are signaling that additional rate hikes are forthcoming.
The monthly Crop Production report from NASS showed a 13 lb increase to the US cotton yield at 855 lbs/acre. That raised the production total by 219,000 bales to 14.031 million bales.
Although, Thursday's weekly export sales report was slightly disappointing, but it must be noted that the cumulative sales for 2022-23 have reached 8.776 million bales, which is higher than the 8.637 million from the 2021-22 season. The five-year average is 9.006 million. Sales stand at 73% of USDA's marketing year forecast versus a five-year average of 63%.
China was the top buyer with 57,300 RBs. Cotton exports from the week were 108,000 RBs bringing the marketing year to date (MYTD) total to 2.774 million. That is up 29% from last year’s pace, though accumulated commitments are only 1.6% higher year on year.
USDA’s weekly Cotton Market Review had 6,574 bales sold for an average price of 86.56 cents. The Cotlook A Index was up by 95 points to 103.55 cents/lb. USDA set the week’s Adjusted World Price for cotton at 76.74 cents, an 11.28 cent increase. ICE certified stocks were 880 bales on November 9.
The Cotton Ginnings report showed had 4.384m RBs ginned for the season through October. That is the most since +6m bales in 2019/20. The Seam reported 1,380 bales were sold online for an average price of 82.76 cents/lb on November 9.
Near-term technical trends remain supportive to price up-move. There is possibility of March cotton or May cotton futures contracts to trade around 105 cents per lb.
For Monday, support for December Cotton contract is at 84.93 cents and 83.53 cents, with resistance at 87.29 cents and 88.25 cents.
Considering that the US dollar dropped and the stock market rallied, cotton's under-performance on Friday, is signalling that this impressive two-week rally might be running out of steam.
With December now basically liquidated, there is no reason for March to push higher at this point, considering that cash prices have hardly followed the lead of the futures market and demand remains depressed. The weaker dollar might extend the futures rally for a few more sessions, but without an improvement in demand the market will sooner or later revert back down again.
(By Commoditiescontrol Bureau: +91-22-40015505)
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