Cotton Weekly: India Faces RCM/Quality Issue; Export Likely To Take a Hit

MUMBAI(Commoditiescontrol)- Indian market may have found a sweet spot to trade between Rs 37,000-39,000/candy however RCM issue brought a temporary bullish bias.

US Market surged as demand has a strong potential to grow further amid temporary withdrawal of export competitor India.

US MARKET:

The US ICE Cotton futures showed strength with the benchmark March contract surging 4 percent over the week to settle at 71.93 cents/lb on Friday.

During the holiday shortened week, The benchmark March contract has breached the key resistance level of 70.23 cents on Monday itself when it closed higher 2 percent to 70.85 cents/lb on technical buying. (Full Report)

Expectation of better demand on heels of two consecutive strong export sales report and the recent quality issues in India has raised cotton prices. India has temporarily withdrawn from export shipments due to quality issues and RCM factor.

The other factor which is the large on-call sales at 14.21 million bales(480lb) as of Nov 17 with major share of 36 percent in March at 5.05 million bales(480lb) followed by May at 2.71 million bales(480lb)(19% share) and July at 2.79 million bales(20% share).

During the week(Nov 10-17), December on-call sales declined 48 percent to 0.82 million bales as mills fixed their outstanding on-call commitment ahead of the first notice day on Nov 24 which raised December price by 1 percent to 69.78 cents/lb as on November 17. The figures may have completely declined during the first notice week of December as prices surged 4 percent to 72.73 cents on November 24.

The on-call commitments as on Nov 10 increased significantly 4 percent, w/w, to a sum of 14.75 million bales whereby the commitments in March rose 10 percent 4.97 million bales as various international mills were interested in purchasing US cotton.

This is confirmed in the export sales figure where total commitments have reached 10.05 million bales from which 22 percent have been shipped at 2.21 million bales while the remaining 78 percent is outstanding at 7.85 million bales. Sales remain much ahead while shipments continued to slack off as quality issues in some key growing regions.

Major importers such as China and Pakistan have been prominent buyers which reflect their need for our quality types, but also are an indication cotton supplies in countries competing with us for exports, such as India, are very tight.

Going forward, the market seems to repeating last year’s tug of war between mills and the spec community. Last year, For months mills sought to fix their large volume of on call sales at breaks in the futures price while the specs provided cover by holding tight to their huge long position. All the while this to and fro battle served to prop up market prices.

This year, the battle could likely once again take place with mills poised for the rematch amid large on-call commitments. The missing link at the moment is the spec community’s rather meager long position. Nonetheless, they could be seduced as fundamentals continue to improve. In any event, the large volume of unfixed sales will generate a great deal of buying power in itself over the next several months.



Technical Ideas(MARCH): In last update, we had indicated that upside momentum will resume above 70.23 and breakout was observed on Monday. Bandwidth indicator has increased with a rise and positive candle along with a settlement price at 71.93 on Friday indicating higher range can be tested with chances of volatility.

Higher range of 72.87-75.54 can attract resistance from trend line levels of 72.50. Stochastic has risen to overbought zone therefore higher range could attract resistance and sustainability issue may remain. Trend line resistance hangs overhead along with an overbought stochastics.

Since last week was a large candle, current week can show minor correction within last week’s range for consolidation before moving higher again. Weaker opening and correction first to 71.14-70.2 can be used for buying with a stop loss of 69.40.

Further breakout and close above 72.87 is essential for a rally to extend higher towards 74.59-75.75.

CHINA FUTURES MARKET:

The ZCE Futures traded continued sideways pattern with slight bearish bias for the week ended November 24.

The benchmark ZCE January futures settled at 14,910 yuan/tonne on Friday, lower 1 percent from Nov 17 amid 8 percent decrease in open interest to 152,746 lots indicating major long liquidation.

China October import figures showed 89 percent, y/y growth, to a volume of 78,128 tonnes while accumulated volume(Jan-Oct 2017) rose 41 percent growth, y/y, to 983,450 tonnes.



Technical Ideas(JAN): Expect lower range of 14,800-14,560 to be tested hence we recommend to exit long position and sell on rise from 14,910-15,040 on better opening during the week with a stop loss of 15,311.

The last bottom set at 14,650 could be tested therefore lower range of 14,800-14,560 could attract support where short covering profit booking could likely be witnessed.

If lower range of 14800 or below is attained first and higher range of 14930-15040 is
attained later in that case traders can avoid selling.

INDIAN FUTURES MARKET:

The Indian cotton futures moved marginally higher on good buying in the market for the second consecutive however prices trend in a set band.

The benchmark December futures settled at 18,540/bale on Friday, slightly higher Rs 70(0.4%) over the week. Open interest increased 5 percent, over the week, at 4,873 lots(1.20 lakh bales of 170kg).



Technical Ideas(DEC): Indecisive high wave candle has been formed in a downtrend and trend will remain down if prices close below Daily Reversal Value(DRV) of 18,803 or vice versa. However, price trend does not completely determine upward or downward movement in prices.

Next directional movement would be if prices breach support at 18,320 and resistance at 18,650. As mentioned prices were moving in a set band hence the defined wider band is 17,610 and 19,120 which was observed for the last 14 weeks and the defined narrower band is 17,950 and 18,700.

The bandwidth indicator has fallen 1 percent to the lowest level at 5 percent. Price movement and up move in Bandwidth will try to show direction with probability of price move higher in short to medium term either from current level or dipping a bit before moving higher.

INDIAN SPOT MARKET:

In physical trade, spot prices showed a mixed trend on sustained demand/supply, Reverse Charge Mechanism(RCM) and quality issues in two major producing regions.

Weekly averages of the benchmark cotton variety in most markets showed a positive growth except Madhya Pradesh which dropped 0.5 percent to Rs 37,310/candy.

There was uncertainty growing in the market amid ginners issues against the recently implemented Reverse Charge Mechanism(RCM) and quality issues in the first picking of Maharashtra and Telangana.

Ginners were facing serious issues due to RCM as there was no set off for the 5 percent RCM while selling bales to exporters who would purchase at 0.01 percent. The main factor was delay in refund in the form of Input Tax Credit(ITC) as the government had promised 7 day return from the date of filing the return and haven’t fulfilled the promise.

The aforementioned and other issues has triggered anger amongst the ginners especially in the state of Gujarat where the ginners association have called for an indefinite strike from November 24. The All India Cotton Ginners Association has requested to call off the strike however the ginners in Gujarat ignored the request and due to which daily crop arrivals dropped to season low of 5,000 bales in Gujarat. (Full Report)

The other factor which was a cause of concern was quality issues in Maharashtra and Telangana. The key producing districts(Marathwada/Vidharbha) of Maharashtra faced the pink bollworm pest attack on the crop while Telangana faced high moisture content. Both faced these issues due to erratic spell of heavy rains during the first half of October.

However, various trade sources confirmed that the second picking quality of cotton crop has significantly improved and the arrivals during the month of December will face no such issues. There could be shortage of quality cotton until December and this could effect prices.

While the RCM issue has already factored in prices of the Gujarat which rose Rs 150-200/candy on Friday due to low number of sellers in the market while the quality issues have yet not factored in the cotton prices.

The reason the quality issues have not yet factored in the prices is due to cautious buying from leading spinners who have fended from procuring in huge lot deals. Slow growth in the yarn market since June until October due to liquidity issues post GST implementation on July 1 and this has curbed buying enthusiasm of various local spinning mills.

However, the yarn market is slowly picking up pace as good inquiries, both domestically and internationally, in the month of November. Yarn rates have increased by 8 percent in the past three months, reaching the levels seen during the month of July. Taking the 60s Carded Weft(Coimbatore) as the benchmark, prices rose to Rs 228/kg as of November 24. Similarly, warp prices have also risen to nearly 5 percent during the same period. (Price List)

Consumption is likely to increase this season with estimates at 31 million bales(170kg each), higher 5 percent compared to last season at 29.5 million bales as the industry has settled with most issues in related to GST and expectation of better global yarn demand.

On the other hand, exports could likely take a hit due to the RCM issue and quality issues as experts were predicting exports surplus estimates at 6 million bales down from early estimates of 7.4 million bales and similar to the figures of 2016/17 seasons. Export commitments have reached 2 to 2.2 million bales as of Mid-November with shipments of 0.09 million bales completed as of the month of October. (Full Report)

Meanwhile, Cotton crop supply for the week(Nov 20-24) rose 9 percent to an estimated volume of 7.34 lakh bales compared to 6.74 lakh bales in the prior week(Nov 13-17) and was significantly higher 34 percent compared to same period last year at 5.48 lakh bales.

Arrivals picked off during the current week as average daily arrivals reached 1.5 lakh bales and has a potential to grow provided the RCM issue is resolved.

Farmer were selling their produce at good rates ranging between Rs 4,000-4,900/quintal for the third consecutive week, not just in Gujarat but other states too and was more or less close to the raised MSP of Gujarat.

Conclusion:

The Indian cotton prices have trended in a sideways pattern ranging between Rs 37,000-39,000/candy since the month of October and the pattern has grown even more narrower to Rs 37,000-38,000/candy.

Supply has yet to reach its full potential which at the moment is averaging at 1.5 lakh bales(daily basis) in the current week. Further, the demand is expected to pick up from December as domestic spinning mills will be eager to replenish their inventories at prevailing rates. Exporters have surplus amount of commitments to be fulfilled for November to January shipments and the recent RCM issue has been a stumbling block.

Hence, dominating bearish trend in the cotton market may have likely ended and once demand picks off, prices will likely increase, however, what is yet to be seen is how much can supply limit the upside once it reaches full potential.

Until then, Rs 37,000-39,000/candy could be the sweet spot of trading range for the next two months.



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