A few times over recent months, The Rupp Report has informed readers about the stock situation with the 10 million tons of cotton in Chinese warehouses. Cotton has undergone a kind of rollercoaster over the past two months. It is now time to take a look at the current ups and downs of cotton. Details in this Rupp Report are based on information from United Kingdom-based cotton trader Plexus Cotton Ltd.
According to the Plexus Cotton Market Report dated April 30, 2015: “NY futures continued to rally this week, as July gained 243 points to close at 67.88 cents, while December added 150 points to close at 66.64 cents. July futures pushed through long-term resistance this week, leaving behind the “double-top” that had formed in late February and early April and posting the highest close since September 12. … For the current season we now have commitments of 10.9 million statistical bales, of which 7.5 million bales have already been exported, while for the 2015-16 season, total sales amount to 1.1 million bales so far. If one looks at the U.S. balance sheet, there is a supply at 18.75 million statistical bales, of which 10.9 million bales have so far been committed for export and a further 3.65 million bales are going to domestic mills.”
One week later in its Market Report dated May 7, Plexus reported: “NY futures reversed course this week, as July dropped 225 points to close at 65.53 cents, while December fell 121 points to close at 65.43 cents. … Shipments of 419,800 running bales were the bright spot in today’s report, as they were about twice the weekly amount needed to reach the USDA estimate of 10.7 million statistical bales. Total commitments for the current season are still at 10.9 million statistical bales, of which 7.9 million bales have now been exported.”
Expectations For U.S. Crops
In the May 7 report, Plexus reported: “Next week, on May 12, the USDA will issue its first set of numbers for the 2015-16 marketing year. Expectations are for a U.S. crop of around 13.5-14.0 million bales and a world crop of around 107-108 million bales, which would amount to a reduction of around 10 percent from this season. Since China will account for a large part of this reduction, the numbers to watch out for in regards to price direction are the ROW (rest of the world) production surplus and Chinese imports.”
“In the current season we had a ROW production surplus of 13.2 million bales, of which China absorbs only 7.5 million bales via imports, which is why ROW ending stocks are increasing by nearly 6 million bales. Therefore, with Chinese imports expected to drop to just 5.5 million bales next season, the ROW production surplus needs to be at or below this number in order to prevent a further increase in ending stocks,” reported Plexus.
“Based on the latest USDA numbers one should see only minor changes in inventory levels outside of China,” said Plexus in its Market Report dated June 4, 2015. “Although the ROW production surplus is going to be considerably smaller than last season, so are Chinese imports, and since these two numbers are expected to cancel each other out, there will be virtually no change in ROW ending stocks.”
Continuing in the June 4 report, Plexus reported: “US export sales for the week ending May 28 were 161,400 running bales for both marketing years, whereof 107,600 bales were for June/July shipment and 53,600 running bales were for August onwards. There were still 16 different markets participating, with Vietnam and Turkey leading the way. Shipments were once again excellent at 309,100 running bales. Total commitments for the season have now reached 11.3 million statistical bales, whereof 9.3 million have already been exported. Considering the amount of sales and the pace of shipments, it is almost a given that the USDA will have to raise its current export estimate of 10.7 million bales, possibly by as much as 0.5 million bales.”
Will Reserve Cotton Be Released?
In the June 11 Market Report, Plexus reported: “NY futures came under renewed pressure, as July dropped 159 points to close at 63.53 cents, while December gave back 90 points to close at 64.38 cents. … Speaking at the ongoing Cotton Conference in Ningbo, a vice-director of the NDRC announced that a plan for the release of reserve cotton was forthcoming within the next ten days.
“If we look at China’s domestic market, we expect a 2015-16 crop of around 5.6 to 5.8 million tons and domestic mill use of 6.5 to 6.7 million tons (we consider the USDA estimate of 7.8 million tons unrealistic). In other words, we may be a production deficit in China of just around 1.0 million tons. However, China is expected to import some 1.2 million tons (0.9 million tons under the [World Trade Organization] quota and 0.3 million tons for the processing trade) next season, which would already cover the potential production gap. Therefore, how can China question remains: how can China fit in reserve sales under such a scenario?”
Rotate Reserve Stocks
According to Plexus: “One possibility is for China to rotate reserve stocks, by buying a million tons of new crop cotton and then releasing some of its 3-4 year old stocks under an auction scheme. However, based on what we know today, there is no easy fix to reduce China’s massive stockpile. Even though China has started to bring its production down by focusing on Xinjiang and forcing Eastern Provinces to look for alternatives, mill use has started to slip as well as more and more mills are importing yarn made from cheaper foreign growths. China currently imports more than 2 million tons of yarn annually and this trend will likely continue as long as this price disparity between Chinese and foreign cotton exists.
“Although Chinese imports have shifted from cotton to cotton yarn in recent years, mainly due to quota restriction for cotton, China still imports well over 3 million tons of cotton and cotton yarn combined at the moment,” reported Plexus on June 11. “This makes it difficult for policymakers to get this big inventory monkey off their back and to make matters worse from a Chinese point of view, it underpins foreign mill use. This is the reason why we see the current situation in China as somewhat supportive to international prices.
“The most effective remedy to the Chinese predicament would be a narrowing of the price gap between Chinese and international prices. This would disincentivize imports, make Chinese mills more competitive, boost local mill use and eventually lead to destocking. Unfortunately, the current policies are not geared towards this outcome and unless there is a major crop problem somewhere else, we are likely to see no change to the status quo.”
Reading the Plexus Market Report dated June 18 reveals: “Traders continue to be uneasy regarding the impending Chinese Reserve Policy announcement, which some fear will lead to the dumping of reserve stocks on an already depressed local market. However, … we still think that this exercise will mainly serve to rotate reserve stocks, since the Chinese market isn’t in a position to absorb any sizeable amount of additional cotton. In other words, we will probably see the release of 3-4 year old inventory, sweetened with that of some imported US cotton, against which the Chinese Reserve and/or the Xinjiang PCC will accumulate current crop stocks.
“Of interest in this regard is the most recent data on Chinese and Vietnamese cotton imports. China imported another 750,000 statistical bales in May, bringing the 10-month total (August 2014 to May 2015) to 7.07 million bales. At this pace, China is likely to surpass the USDA’s recently increased import estimate of 8.0 million bales. Just five months ago, the USDA had Chinese imports still at 7.0 million bales. … The above statistics suggest that Chinese raw cotton and yarn imports are still going strong, which is why we are seeing mill use in China declining. Unless the Chinese government somehow manages to curb cotton and yarn imports, we don’t see much hope for a meaningful reduction in reserve stocks anytime soon.
Stable Cotton Consumption In China
According to the latest information from the Washington-based International Cotton Advisory Committee: “World cotton consumption in 2015-16 is forecast up 2 percent to 24.9 million tons. China’s consumption is expected to remain stable at 7.7 million tons, though its share of total world consumption will likely decline to 31 percent, which is the sixth consecutive season of reduction since 2009-10 when it accounted for 40 percent of world consumption. India’s mill use is projected up 3 percent to 5.4 million tons in 2015-16, accounting for 22 percent of world consumption.
“Strong demand from countries that rely on imports to support their spinning sector is expected to boost world trade in 2015-16 to 7.7 million tons. Imports outside of China are projected up 4 percent to 6.1 million tons, partially offsetting the 9 percent decline in Chinese imports to 1.6 million tons.”
July 14, 2015
