Cotton Weekly: Indian Market Trends Bearish For 2nd Consecutive Week Ended May 5

MUMBAI(Commoditiescontrol)– Indian Cotton market exhibits bearish trend for the second consecutive week while US Cotton market trades in consolidation for 14 straight session.

Let’s first look at how the global market faired throughout the week ended May 5 in detail.

US MARKET:

The US cotton futures demonstrated a bull run earlier in the week however ended the week with a biggest intraday loss of 1.4 percent since April 13.

The July contract hovered around the one week high level at 79.37 cents on May 2 however settled on the lower side nosediving 1.44 percent or 1.14 cents/lb to 77.77 cents/lb on Friday which then showed 1.4 percent decline in over a week.

The benchmark July contract was trading in the a tight range of 77.5 to 79.5 cents/lb in the past 15 sessions which was indicating that both speculators and trade shorts were holding onto their positions.

The record high July open interest was increasing as each day progressed which was supporting speculators bullish sentiment. As of May 5, open interest in July stands at 141,874 lots (14.77 million 480lb bales) which grew 3.8 percent in a matter of one week.

The latest CFTC report confirmed that it was new spec and index fund buying and trade shorting that boosted open interest. As of April 25, the net spec long position increased by 0.88 million to 9.8 million bales, while index traders expanded their net long by 0.36 million to 6.6 million bales.

On the other hand, the trade net short position increased by 1.25 million to 16.4 million bales. Possibly, the current positions might have increased considering the rise in open interest this week.

Meanwhile, the on-call positions marginally declined in the week prior which was nothing to boast, as the report of April 25 showed July on call position declined 349 to 45,384 lots (4.54 million 480lb bales) however, surprisingly December rose 1,334 to 29,771 lots (2.94 million bales). Mills were holding on to the unfixed position in expectation of prices to fall to 75 cents level and accordingly fix their outstanding position.

The market received further support from the modestly positive export sales on Thursday. The USDA, in its weekly export sales report released on April 27 pegged export sales at 154,000 Running Bales (RB) in the week Apr 21-27, 2017. It increased 27 percent from previous week's 121,400 RB. (Full Report)

Total commitments for the 2016-17 season were reported at 13.97 million running bales (14.34 million 480lb bales) which has surpassed the USDA’s 14 million 480lb bales figures. The USDA’s May World Agricultural Supply Demand Estimates (WASDE) report due on May 10 may likely revise export estimates to higher side of 14.5-15 million bales which would decrease the ending stock figures to a more or less 2 million which would be a major supportive factor unhampering the bull run.

However, USDA may likely publish the 2017-18 estimates where the market expects increase in US cotton’s production estimates. This may likely bring some temporary bearishness in the market.

Considering all the above factors, the bull seems to have a thick edge over the bear. Even if there might be a temporary bearishness, the higher unfixed on calls where trade shorts would provide a significant support in the weeks ahead.

The tug of war continues between the long-positioned speculators and trade shorts. The present situation supports the sentiment of speculators however a surprise cash in from higher levels witnessed previously in March and May contract may push prices below the 75 cents bringing tremendous relief to the trade shorts.




CHINA MARKET:

The ZCE cotton futures traded mostly on the positive side demonstrating 3 consecutive rally after which witnessed a trend reversal to settle on the lower side on Friday.

The September contract on ZCE futures snapped 3 session losing streak to settle lower 0.74 percent to 15,995 yuan/ton while declined 0.7 percent over the week.

As of May 5, open interest increased 11.5 percent to 3.13 lakh lots indicating long build up amid rise of 0.9 percent in price over the week.

The China State Reserve auction continued its moderate to healthy sales during the week. As of May 5, around 948,597 tons (55.80 lakh 170 kg bales) were sold from the total offered quantity of 1,303,255 tons (76.66 lakh bales). (Full Report)

INDIAN MARKET:

The Indian cotton futures traded in a tight range 410 points trending back and forth throughout the week ended May 6.

The MCX May fell to 14 week low at Rs 20,530 on May on major long liquidation as open interest declined 4 percent to 7,370 lots (1.84 lakh 170kg bales). However, short covering from speculators rebounded price to Rs 20,710/bale on Friday.

The market turned bearish since May 2 as open interest consecutively declined 4 days in a row to 6,678 lots on Friday amid major short covering supporting prices.



Further, limiting the upside was the lackluster demand in the spot market and the expectation of increase in sowing acreage which as per International Cotton Advisory Committee (ICAC) is estimated to rise 7 percent to 11.3 million hectares in 2017-18. (Full Report)

Technically, the market is witnessing a sideways to bearish trend as price was almost trending in line with the Daily Reversal Value(DRV) at Rs 20,665. Further, bandwidth is falling which indicates compression and contraction of volatility. Expect next directional movement outside the 2-week high at Rs 21,190 and low at Rs 20,420.

Resistance is placed at Rs 20,910 and Rs 21,190/bale while support is placed at Rs 20,500-20,090/bale.



DOMESTIC SPOT MARKET:

Spot market boasted another week of losing streak, declining nearly Rs 300-800/candy averaging between Rs 32,500-44,900/candy.

The Maharashtra 30mm prices fell 1.3 percent or Rs 540 to average at Rs 43,050/candy from Rs 43,590/candy in the previous week. Meanwhile, The Gujarat Shankar 6 A Grade cotton plunged 1.9 percent or Rs 800 to Rs 43,060/candy compared to Rs 43,880/candy in the last week.




The bearish sentiment in the market had a major impact of the lower grade(22-26mm) also known for its marketing term ‘furdar quality’ which declined Rs 5,500-5,700/candy or 14.5 percent to R.s 32,500-33,500/candy in over a month.

However, steep fall in furdar cotton encouraged procurement from MNCs to meet the export demand from Bangladesh textile mills. The fardar quality lint is used to spin 2s-16s yarn counts which is then produced into finished denim products by the textile mills.

Meanwhile, demand for the good quality lint(29-30mm) remained subdued for the second consecutive week as sellers/stockists were quoting a higher price for the limited stocks withheld in their inventories. However, due to slack demand, sellers failed to sustain the higher pricing levels which has fallen nearly 4 percent or Rs 1,500, since April 3, to an average of Rs 42,500-43,500/candy.

Expectation of rise in production of denim goods which may likely increase furdar quality cotton price and subdued demand of superior quality lint would cap price rise in the days ahead. Considering these two factors, the historically huge spread gap between both varieties may likely shrink to a normal level of Rs 4,000/candy from the present Rs 10,000/candy.

On the arrival side, as per the data collated from market sources, arrivals for the week (May 2-5) declined 27 percent to 2.07 lakh bales from 2.84 lakh bales in the prior week (April 24-28) with the average daily arrivals falling to 0.50 lakh bales from 0.57 lakh bales.

Conclusion:

The Indian cotton market seems to trend towards a bearish trajectory with no major bullish factor supporting the market. The upside is limited with short term resistance at Rs 45,000/candy(excluding North Indian cotton market)




With imports, including 6.18 lakh 170kg bales of US cotton, expected to hit the market beginning from Mid-May onwards and sowing intentions reporting from June onwards, prices may likely come under pressure falling to Rs 40,000/candy level previously seen at the beginning of the season.

Further, there may be a possibility of panic selling from ginners holding good quality lint at prevailing rates which may additionally put pressure on Indian domestic cotton price in the month of May.

The cotton spot prices were following the global futures market trend which caused major volatility in the past few weeks. The historical price trend showed that spot prices have reached the same levels observed during the early March. It seems the market has placed a resistance between Rs 46,000 and Rs 46,400/candy.

Expect volatility in the spot prices if it continued to follow the futures market trend.

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