Cotton Weekly: Range Bound Trading Witnessed In India And US

MUMBAI(Commoditiescontrol): Indian and US cotton market exhibit sideways trends in lethargic trade while China State Reserve Auction weekly turnover touches 69 percent for the week ended June 2.

US MARKET:

The ICE July futures ended the week on a bearish note as it settled 0.5 percent or 40 points lower at 76.69 cents/lb compared to 77.09 cents/lb in the previous week.

The July contract seemed to have lost the enthusiasm of another bull run as it continued to trend range bound within 215 points at 76.57 and 78.72 cents/lb since May 23. Open interest persistently declined since May 15 when prices hovered near the three year high at 87.18 cents/lb and synthetic high at 88.40 cents/lb hit via options.




Open interest, last recorded on Thursday, declined 41,585 lots to 88,324 lots in matter of 12 sessions amid 10.37 cents fall in price to 76.81 cents/lb indicating massive long liquidation. However, since price fell back to reality there were quite a good number of trade short covering attributed to the mill fixation of the outstanding on call commitments which provided support to prices at the 76.90 cents/lb.

As per the latest on call report as of May 26, July on call position decreased 6,363 lots to 31,050 lots (3.11 million 480lb bales) and there may have been further decline during this week(May 29-June 2) considering the short covering observed on May 30 and June 1.

The new crop December showed growth of 1,005 lots to 35,833 lots (3.58 million 480lb bales) which may likely provide support to prices.

Meanwhile, the USDA export sales for the week ended May 26 pegged new commitments at 113,700 Running Bales (RB) taking the total commitments for the 2016-17 season at 14.39 Running Bales (14.77 million 480lb bales). (Full Report)

The modest export sales figures failed to provide any support to July as speculators continued to liquidate their position which pushed prices below the first support level and settled to a 16-session low at 76.69 cents/lb on Friday.

With major index fund roll scheduled for next week, open interest would further decline along with support provided by the trade shorts leading to a tight range trading for next week. If prices fall below the support level at 76.17 cents and 75.35 cents then the remaining speculators will liquidate their position bringing the prices further down and narrowing the intercrop straddle between July and December to 200 points which was at 357 points as of June 2.

The July options expiry was on June 16 while the first notice day was on June 26. Prices would trend range bound unless some fresh cues hits the sideways trend.

CHINA MARKET:

The ZCE cotton futures trended bearish to hit a 8 week low at 15,405 yuan/tonne on Thursday on additional shorts for the week ended June 2.

Open interest increased 16 percent to 233,238 lots indicating additional short position during the week amid 2.53 percent fall in price to 15,405 yuan/tonne.

Minor intraday short covering was observed on Friday which pushed prices higher 0.2 percent to 15,440 yuan/tonne.




Meanwhile, the State Reserve auctioned a total of 89,866 tonnes from which it sold 61,860 tonnes for the week ended June 2 touching a weekly turnover at 69 percent. Around 1,321,788 tons (77.75 lakh 170 kg bales) were sold from the total offered quantity of 1,871,888 tons (111.01 lakh bales of 170kg). (Full Report)

INDIAN MARKET:

The Indian cotton futures was trading in a tight range of 500 points since May 24 exhibiting a sideways trend as observed in the technical chart with some speculative long liquidation observed during the week.

The MCX June settled down 0.8 percent or Rs 270 to Rs 20,930/bale over the week while slumped Rs 480 from a 10 session high at Rs 21,390/bale.

Open interest declined 256 lots to 5,309 lots (1.33 lakh bales of 170kg) indicating some speculative long liquidation.

Technically, sideways movement and oscillation was being witnessed around the Daily Reversal Value (DRV) at Rs 20,686. Accumulate at Rs 20,723 or below with stop loss of Rs 20,640.




DOMESTIC SPOT MARKET:

A two-session rally between May 27-29 on account of some active need based buying from local mills led to nearly 1.5 percent rise price for the week ended June 2.

The Gujarat Shankar 6 30mm cotton surged 1.3 percent or Rs 580 to Rs 44,170/candy compared to Rs 43,590/candy in the prior week. Meanwhile, the Maharashtra 30mm rose 1.2 percent or Rs 530 to average at Rs 43,990/candy from Rs 43,460/candy in the previous week.




Demand from local mills, which lasted merely three days, were actively purchasing mostly for restocking purposes. However, the demand spree turned silent as the week progressed following the higher asking rates from leading sellers and uncertainty on the final GST rate for the textile and garment sector.

Trade activity turned lethargic as both buyers and sellers adopted a wait and watch strategy ahead of the GST meet on June 3. Many analysts believe that 5 percent GST would be levied on the entire textile sector. However, others believe 12 percent GST would be much more beneficial for the industry.

If the entire industry is taxed at the lowest GST rate of 5 percent, then input credit could not be fully claimed. Garments, being value added items, are likely to be taxed at 12 to 18 percent, it is reported. Then, 80 percent of fabric is a blend of cotton and synthetic yarn. To ensure full compliance and avoid GST arbitrage, the rate of tax for both segments should be equal, said SC Kapur, director general, Association of Synthetic Fibre Industry.

After the final decision on the GST rate for the textile industry, the lethargic trade would likely witness revival for the next few weeks until July 1 which was the beginning of the new tax regime for the country.

On the old crop arrival side, as per the data collated from market sources, arrivals for the week (May 29-June 2) declined 13 percent to 1.50 lakh bales from 1.72 lakh bales in the week prior (May 22-26) with the average daily arrivals falling to 30,000 from 34,500 bales.

As of May 31, nearly 92 percent at 31.33 million bales of 170kg each from the total estimated crop at 34 million bales as per Cotton Corporation of India (CCI). (Full Report)

The 2017-18 crop planting is in full swing showing good growth week on week with North India completed 75 percent at 11.28 lakh hectares of the estimated normal area(5 year average) at 15 lakh hectares. (Full Report)

Many regions are expected to witness rise in sowing acreage as farmers received a lucrative price ranging between Rs 4,900-6,200/quintal which encouraged switching from other commodities for next season.

Cotton area in India is forecast to expand by 7 percent to 11.3 million hectares, and assuming yield is similar to the 4-year average of 528 kg/ha, production could increase by 3 percent to 6 million tons (353 lakh bales) in 2017-18 according to International Cotton Advisory Committee(ICAC).

Further, Indian Meteorological Department(IMD) has forecasted normal monsoon at 96% of the long-period average (LPA) which if holds true then could likely increase production.

Conclusion:




Looks like the Indian spot prices were hovering around the levels when the prodigious bull run took place. The GST meeting held today which if the rates are fixed then would likely bring in fresh cues pushing prices mostly to the upward side.

Fundamentally, bearish factors, such as rise in 2017-18 production estimates ranging between 350-360 lakh 170kg bales amid increase in sowing acreage, expectation of good monsoon season and higher imports, has an edge over any existing bull factors which in turn is limiting uptrend on the market.

With most mills covering the requirements for the next 2 to 3 months, cotton prices may not likely continue the upward trend with resistance seen between Rs 45,500-47,000/candy depending upon the market and variety of cotton sold.

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