In 2020, the global cotton market supply and demand levels are still relatively loose, and there is a gap between China’s production and demand expanded. The once-in-a-century COVID-19 epidemic has severely damaged the world economy. Looking into the post-epidemic era, survival and development in the huge wave of liquidity and real competitive environment have become the basic forces driving the cotton market this year.
1. Global cotton consumption dropped sharply in 2019, and supply was significantly oversupply
The smoke of trade friction is not yet over. However, the COVID-19 epidemic followed one after another, and global cotton consumption dropped sharply in 2019, resulting in a significant excess supply.
1. Global cotton consumption has reached its lowest level in the past 15 years
The Sino-US trade friction situation is severe. , against the background of bleak prospects for downstream cotton exports, time has entered the 2019 cotton year. On December 13, 2019, China and the United States reached agreement on the text of the first-phase economic and trade agreement. On January 15, 2020, China and the United States signed the first phase of the economic and trade agreement. At the end of 2019 and the beginning of 2020, the COVID-19 epidemic broke out. To protect lives, quarantine measures were implemented in China and overseas. Global cotton consumption in 2019 was approximately 22.236 million tons (U.S. Department of Agriculture in September), a new low since 2004, with a year-on-year decrease of more than 15%, the largest decline since 1989. According to data released by the National Cotton Market Monitoring System, China’s cotton consumption dropped to 7.014 million tons, a year-on-year decrease of 12%.
Figure 1 Comparative data of global cotton consumption since 2001 Source: National Cotton Market Monitoring System United States Department of Agriculture
2. The global cotton supply and demand relationship has changed from significantly loose to even looser
Compared with the shrinkage of cotton consumption, as a bulk agricultural product, the supply side of cotton is difficult to change accordingly. The incompatibility between supply rigidity and demand elasticity has become the main contradiction in the cotton market under the background of the new crown epidemic. From February to July 2020, international institutions raised the 2019 global cotton ending inventory consumption ratio from 69% to 98%, reaching a peak in more than 30 years.
Figure 2 Global cotton market ending inventory to consumption ratio data source since 1989: National Cotton Market Monitoring System United States Department of Agriculture
2. Domestic and foreign cotton prices experienced twists and turns in 2019, with the annual average price falling sharply
The external environment has had a violent impact on the cotton market in 2019. Massive funds, market sentiment, industry operating indicators, capital market trends and their marginal effects have dominated the cotton market pricing mechanism.
1. Pessimism, pressure reduction and hope
At the beginning of 2019, faced with the increase in cotton production Along with bleak consumption and pessimistic market sentiment, China’s higher commercial inventories have increased the decline in domestic cotton prices. In December 2019, the national reserve cotton rotation policy was launched, reducing the pressure on cotton supply. The first phase of the Sino-US trade agreement has made progress. The pessimistic atmosphere gradually faded away, and people placed hope on the market prospects. With the obvious release of cotton price risks, capital has taken advantage of the situation to deploy. Zheng Cotton’s main contract rose all the way from early October 2019 to mid-January 2020, rising from 12,085 yuan/ton to 14,370 yuan/ton, an increase of approximately 18.9%. The main contract of ICE cotton futures climbed from 57.86 cents/pound in early September 2019 to 71.53 cents/pound on January 13, 2020, an increase of more than 23.6%. Domestic and foreign cotton markets have resisted the pressure of concentrated listings of lint cotton in the northern hemisphere, and the market has maintained a fluctuating upward trend.
2. Anti-epidemic, wait-and-see and panic
At the beginning of 2020, the new crown epidemic broke out, and the market It has experienced rapid decline and panic plunge. From January 14 to February 3, 2020, the epidemic broke out in China. In less than 10 trading days, domestic cotton prices fell by 11.8%. Overseas markets were mostly wait-and-see, and cotton prices fell by 6.6%. After arduous efforts, China has reversed the epidemic situation. From February 4th to 19th, cotton prices stabilized and rose. Just when people thought that the epidemic was about to end and China was resuming work and production, overseas epidemics broke out and the global alarm was sounded. From late February to March, 60 countries around the world declared a state of emergency, and some countries declared a “state of war” or “state of war.” Some major countries are frantically grabbing anti-epidemic supplies. The global financial market is in panic, prices have plummeted, the U.S. stock index has been circuit breaker four times, the panic index has reached new highs, and the May contract of U.S. crude oil futures has fallen into negative territory. In 27 days, domestic and foreign cotton prices fell by 22.23% and 30.49% respectively.
3. Soothing, repairing and greed
Thanks to multiple favorable factors, cotton prices have not Afraid of falling yarn prices, the market center of gravity shifts upward. First, countries around the world have introduced huge economic aid policies, pushing fiscal support to new heights, and the level of monetary policy easing has reached a new record high. Secondly, as the epidemic situation in Europe and the United States stabilizes, especially the shortage of ventilators and other anti-epidemic materials in New York City in the United States is gradually alleviated, the market panic atmosphere is gradually easing. Thirdly, the U.S. Nasdaq stock index stopped falling on March 17. Precious metals such as gold, silver and copper rebounded rapidly on March 19. Abundant liquidity seized the rising opportunities. In early April, the rise in the capital market became a prairie fire. potential. Cotton prices at home and abroad stabilized and rebounded. Fourth, the retail sales and exports of China’s clothing products increased year-on-year.�The realistic side of economics will once again attract people’s attention and will form the main fulcrum of market operation. Times have changed, and as we approach the post-epidemic era, the pricing logic of risk assets is bound to face a switch.
4. Whether the global immune barrier can be fully realized in 2020 remains uncertain
Vaccination against COVID-19 Vaccines and achieving “herd immunity” are the common goal and only hope for people around the world to control the ongoing outbreak of the new coronavirus epidemic. As of early September, a total of 10 COVID-19 vaccines worldwide have entered Phase III clinical trials. It is estimated that the total global production capacity will be up to 1 billion doses in 2020, which will only cover about 500 million people. If vaccine research and development proceeds smoothly, it is expected that developed economies such as Europe and the United States will take the lead in realizing large-scale vaccination from the end of 2020 to the first half of 2021 with abundant orders, and establish a herd immunity barrier. As the production capacity of nucleic acid vaccines and other technical routes is easy to expand, it is expected that global production capacity will be rapidly expanded to billions or even tens of billions of doses in 2021. By then, developing countries in Asia-Pacific, South America and other countries will begin large-scale vaccination, and the global epidemic situation will be better controlled. control. Festivals such as Christmas, New Year, and Spring Festival are important sources of clothing consumption, and the prospects for market recovery at home and abroad will still be complicated.
5. Can the “Liquidity Bridge” be seamlessly connected with the cotton real economy?
Currently , people pay attention to vaccination and look forward to the establishment of herd immunity barrier as soon as possible. The time series distribution of market sentiment in 2020 is in sharp contrast with that in 2019. Overall, market sentiment in 2019 was initially low and then high. If the market sentiment temperature is too high at the beginning of 2020, it may lead to a structural risk in which the annual market price is high and then low. At present, the most significant feature of the cotton market is that the market sentiment at the beginning of the year is significantly higher than the previous year. The market’s confidence in the economy’s ability to overcome the epidemic has increased significantly, and people are looking forward to the advent of the post-epidemic era. Returning to reality, the COVID-19 epidemic has intensified the profound changes in the world that have not been seen in a century. The global divide between rich and poor is evolving rapidly, and waves of populism and anti-globalization are rising one after another. The world’s debt is high and economic growth is weak. Since September, rational thinking has returned to the international financial market, and people have begun to face up to the excessive deviation between the U.S. stock market and the real economy. The cotton market and other bulk commodities have been restrained, and some varieties that have risen excessively are facing “liquidation.” Capital Bridge, which is mainly woven by liquidity, has been deduced from April 2020 to the present. At present, yarn prices have just stabilized, cloth prices are still falling, and the downstream power to support cotton prices has yet to be consolidated. Simple truth reminds us that only bottom-up power from the end of the industrial chain can lead the cotton market to a distant future.
The year 2020 has arrived. I sincerely wish friends in the cotton industry to seize the opportunity, avoid risks, and achieve steady and long-term development!
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