Early in 2007, the domestic cotton market is likely to increase in activity. The uptrend of prices in December is expected to continue. However, many factors will curb this upswing. We have a cautious, optimistic attitude towards the domestic cotton market before the coming of Chinese New Year on February 18.
Domestic prices went up slightly in December, with CNCotton S (grade-3 seed cotton price index) rising to 12,616 yuan per ton from 12,312 yuan per ton, up 2.47%, and CNCotton B (T328 lint cotton price index) rising to 12,910 yuan per ton from 12,708 yuan per ton, up 1.59%. The reasons are as follows:
First, the domestic market shows vigorous spot trading. In December, CNCotton S was 0.88% higher than CNCotton B, which triggered the rising price of lint cotton. According to data from the National Cotton Market Monitoring System (NCMMS), average cotton sales reached 38.01% nationwide as of December 27, up 6.7% from last year, with 2.16 million tons of new crop sold, up 37.58% from last year.
The purchasing volume of mills has also increased. A survey by CNCotton shows that the raw cotton inventory of mills increased up to an average level of 40 days in December.
Second, global prices are boosting domestic prices. The net speculative positions turned from short to long in the New York futures market. According to NYBOT, in December, speculative positions turned from 6% net short to 6.6% net long. Furthermore, the short supply in the U.S. led to a firm price.
Third, prices in the global market are higher than in China. The International Cotton Index (M) averaged about 58 cents per pound, equivalent to 12,950 yuan. The average price of standard grade cotton in China is 12,802 yuan per ton.
Finally, favorable policies strengthen optimism for the market. The calls for reserves of 300,000 tons of Xinjiang cotton at the price of 12,700 yuan per ton and a sliding-scale tax for additional import quota in 2007 will push the price higher in the future.
Looking Ahead
Cotton prices may go up slightly, but resistance will appear. Buyers and sellers will be active during the early year. Mill demand for raw cotton will be robust. Cotton yarn and cloth output has increased rapidly since the beginning of this crop year. The National Bureau of Statistics (NBS) shows that as of November, yarn output was 4.6849 million tons, up 19.14% year on year, and cloth output is 6.215 million meters, up 15.24%.
Recent reserves progress shows that merchants are passionate about selling their cotton for reserves. While the mainstream market sees this as a bullish factor, at the same time, it lowers the import tax for the offering price below 59 cents per pound.
The price advantage of imported cotton may appear again, but its impact is limited. The 894,000-ton cotton import quota with 1% tax was allocated by the end of December. Current Cotton Index (M) is about 61 cents per pound, equivalent to 12,088 yuan per ton after VAT and port charges, which is much lower than domestic prices of the same grade. Meanwhile, RMB appreciation will go on in 2007. On December 29, the exchange rate of RMB against the U.S. dollar has lowered to 7.81-to-1.
According to a survey by CNCotton, a 50% to 80% decrease is noted for the stock of imported cotton in bonded warehouses since November. Therefore, the 894,000 tons of cotton import quota with 1% tax won’t be able to cause a serious impact.
Finding the right price
With the price decline, the gap between yarn and raw cotton has increased from 5,400 yuan per ton in October to over 6,000 yuan per ton in December. However, the price rebound narrowed the gap, and mills cannot bear higher prices.
From a macroeconomic view, the global economy will weaken this year, so growth in the demand for textiles won’t be great. Thus, the weak yarn price is unlikely to change, and the cost of textile production rises constantly.
Taking a look at supply and demand, world ending stocks have topped at 10 million tons since the 2004/05 crop year. According to USDA, world ending stocks are likely to be nearly 1.1 million tons. The New York futures price has been moving between 50 and 59 cents per pound since 2004/05, near its ceiling. An upswing depends on the attitude of hedge funds, and no one knows if they will be interested in cotton in 2007.
While bullish factors have emerged, the optimism toward the foreword market requires new support. Hidden bearish factors cannot be chased away by active spot trading in January. We are cautious, optimistic toward the domestic market before Chinese New Year.
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