MUMBAI (Commoditiescontrol) - Cotton prices in India has begun rising from the near seasonal lows established in the third week of March 2016 at Rs 32100 per candy for bench mark variety S6. Season low recorded by CAI for this season were at Rs 31600 in the last week of October 2015. Currently spot prices have risen by little over 3 percent since the recent lows.
Interestingly, both Chinese cotton futures on ZCE and US cotton futures on ICE are also off their recent lows by little over 5%. The recent low recorded in Chinese futures as well as US futures was lowest in last six odd years, in case of China current low was only next to record low recorded in November 2008 (10180 yuan per ton), while in US markets all time low was in October 2001 at 28.20 cents per pound.
But cotton prices in India did not even touch the season low of last season. There are multiple reasons for the same. For one, higher MSP in India act as a major support to the prices as government emerges as the largest buyer at that level. The other reason that did not allow the prices to dip below that of last year was the lower production and higher exports early in the season. The exports could sustain despite the absence of China was mainly because crop in Pakistan failed in the current year, making it the biggest buyer of Indian cotton.
Till the end of March, India is expected to have exported 54 lakh bales of 170 kg. Of this 38% has been destined to Pakistan, followed by Bangladesh (30%), Vietnam and China each around 10 per cent. Lower crop and healthy exports allowed the cotton prices to bottom out much sooner despite record carry forward stocks from previous season (75-80 lakh bales).
As of now S6 at 33,000 – 33,500 per candy is quoting at 2 to 3 percent discount compared to last year, despite a relatively tight cotton balance sheet. This is because last year this time most of the cotton was lying in the government warehouses. Records suggest that at the end of March 2015, CCI had 84 lakh bales in its various warehouses, and the seasonal stock to use ratio of the free market cotton (Oct-March) was at 42%. Because of minimal government buying this year, the same comparable SUR this year is at 61 per cent. This explains the year on year lower prices. Stock to use ratio is defined by ending stocks divided by consumption plus exports.
The consumption numbers on the other hand are also dismal. Ministry of Textiles data of cotton consumption has it red all over. Cotton consumption for the month of January at 24.95 lakh bales is 1.1% lower M/m and -3.2% Y/y. Cumulative cotton consumption (Oct-Jan) at 72.97 lakh bales is down by 2.9% compared to same time last year. Export demand for cotton has also moderated. Seasonal exports (Oct-Mar) of around 54 lakh bales compares to close to 47 lakh bales exported during same period last time, a growth of close to 16%.
All and all the numbers indicate that lower supply during the current season is being met by lower demand. India needs to export at least 70 lakh bales for the season, and consumption to remain steady year on year, for demand and supply to be in balance. This will result in the next season opening stocks to be at equivalent to around two month consumption, which is normal. For that India will need to export close to 3 lakh bales every month, which is very much feasible provided India remains competitive. In a falling global price scenario this caps the upside to the prices.
That is the next big question. What is the downside to the global prices? Threat of Chinese reserve sale has brought the US and the Chinese prices to its multi-year low levels. The recent low is seen as the unofficial sale price of the Chinese reserve sale. The China National Cotton Reserve Corporation has announced some of the details of the auctions of Reserve stocks, expected in second half of April. The Reserve is estimated to be holding 12.7 MMT of cotton (annual consumption of China is estimated by USDA at 7 million tons!); it has indicated it will offer over 4.6 MMT of the stocks in its 2016 auctions or 36% of its inventory. 300,000 tons will be from the 2011 crop and 4,300,000 tons from the 2012 crop and a small portion of 2013 crop.
The full catalog will include 300,000 tons of imported cotton, 200,000 tons of this totals has been inspected and is made up of 150,000 tons of US cotton and 105,000 tons of this inventory is made up of Strict/Good Middling color grades which is 28-30 MM staple. The Reserve auction floor price was not announced but it has said a low grade discount of 880 to 1,700 RMB a ton has been announced which will equal 5.56 to 11.82 cents a lb. The discount will likely apply to much of the domestic cotton inventory given the age of the inventory and the poor quality of the 2012 crop. The CNCE E Forward market closed near 69.06 cents in the July, Aug and Sept contracts which is at a major discount to the Cotlook A Index adjusted for VAT.
It is the final sale price of these mammoth reserve auctions, which will guide the global prices. And even though Indian prices have lower correlation with the global prices in the slack season, the price direction will be guided by the global direction. In the immediate context though, while the prices could recover from the lows, the upside beyond 8-10 percent looks unlikely.
India Bales: 170Kg
India Candy: 356Kg
U.S Bale: 480Lb
Indian Currency: 66.66
(By Commoditiescontrol Bureau; +91-22-40015533)