A few days ago, the State Administration of Grain and Material Reserves and the Ministry of Finance issued Announcement No. 1 of 2020 – “Announcement on Preparations for the Rotation and Sales of Central Reserve Cotton.” The announcement stated that in order to optimize the structure of central reserve cotton, ensure good quality, and enhance the central reserve’s regulatory capabilities, part of the central reserve cotton will be rotated in 2020 and will officially start on July 1.
On July 1, 8035.23 tons of cotton reserves were sold, and the actual transaction was 8035.23 tons, with a transaction rate of 100% and an average transaction price of 11139.3 yuan/ton. On July 2, 8036.469 tons of cotton reserves were sold, and the actual transaction was 8036.469 tons, with a transaction rate of 100%. 35 companies participated in the transaction, and the average transaction price was 11,372 yuan/ton.
So, what signals does this rotation policy release? What impact will it have on the market?
Make full use of the market mechanism
The bottom price of listed sales will follow the market conditions
The current round of central reserve cotton will be released in 2020 During the national statutory working days from July 1 to September 30, the total amount is arranged to be around 500,000 tons, and a balanced release is implemented. In principle, about 8,000 tons are listed for sale every working day. Both the scale and the timing of the cotton reserves this time are in line with market expectations.
Since June, news about the release of central cotton reserves has been heard in the market. Regarding the launch scale, many market participants estimate it to be between 500,000 and 1 million tons. In a questionnaire survey conducted by the China Reserve Cotton Information Center on June 15, 70% of the companies recommended that the country appropriately rotate out cotton reserves, and any amount within 100,000 to 500,000 tons is acceptable. The total amount of cotton reserves released this time is about 500,000 tons, which is within the range of market expectations. In terms of rotation time, for cotton farmers, cotton planting in 2020 has been fully settled, and rotation will not affect farmers’ enthusiasm for cotton planting. The launch date is July, which is basically in line with market expectations.
It can be seen from the rotation policy that the price mechanism of this rotation policy aims to maintain market stability with all its strength. The specific performance For three aspects.
First, give full play to the market mechanism and follow the market at the lowest listed sales price. According to the announcement of the State Administration of Grain and Material Reserves, this round of rotation continues the dynamic adjustment mechanism in line with the market. In principle, it is linked to the domestic and foreign cotton spot prices. The domestic market cotton spot price index and the international market cotton spot price index are each adjusted at 50%. The weights are calculated and adjusted weekly. This means that this round will continue to give full play to the market mechanism and proceed in an orderly manner according to the market conditions.
The second is the first use of the round-out price circuit breaker mechanism. The announcement pointed out that when the cotton spot price index in the domestic market is lower than 11,500 yuan/ton, trading will be suspended from the next working day; when the cotton spot price index in the domestic market exceeds 11,500 yuan/ton for three consecutive working days, trading will resume on the next working day. Start transaction. During the period of continued sluggish domestic cotton prices, the fuse point of 11,500 yuan/ton is equivalent to the bottom price, which means that this round of sales pays special attention to proceeding smoothly without suppressing market prices.
The third is to reserve sufficient policy space to provide “reassurance” to the market. The announcement shows that according to the actual rotation situation of cotton reserves and the supply and demand situation of the cotton market, relevant national departments will choose the opportunity to arrange the rotation. The specific arrangements will be announced as soon as possible. At the same time, the announcement pointed out that during the rotation process of the central reserve cotton, if there are major changes in the domestic and foreign cotton markets, the State Grain and Material Reserves Bureau will make necessary adjustments to the rotation arrangements with the National Development and Reform Commission and the Ministry of Finance based on market regulation and other needs. In the face of uncertainties in the domestic and international economic environment, this rotation policy not only reserves sufficient space for response and adjustment, but also helps guide market expectations and maintain the stability of the cotton market.
Alleviate structural demand conflicts
Will not suppress Cotton market price
“This year’s central reserve cotton rotation started late, nearly two months later than last year. At the same time, the quantity has also decreased significantly, 500,000 tons less than last year.” Henan cotton trader Wang Shengli said that although the start of the central reserve cotton rotation this year has been delayed and the quantity has dropped significantly, it is not expected to have an impact on the market. The main reason is that the cotton market demand has dropped significantly year-on-year this year.
As for the impact of the rotation of cotton reserves on the cotton market price, senior analysts of the cotton market in Hubei Province believe that from this time Analysis of the purpose of the central reserve cotton rotation shows that relevant agencies have fully taken into account the current production and operation conditions of the textile industry. This is a better choice to respond to market calls and support the development of the real economy. In addition, due to the reduction in total rotation and shortened time, it is expected that the central reserve cotton rotation will not suppress the cotton market price.
According to monitoring statistics, as of now, the national cotton reserve inventory is 2.17 million tons, and the remaining cotton reserve warehouses are mostly low. High-quality real estate cotton, and there is currently very little real estate cotton left in the market. This move will make up for the demand for low-quality cotton by cotton spinning companies. Spinning enterprises can use this round of cotton reserves to launch my country’s domestic cotton and textile market, tap the potential of domestic demand, and build a new development pattern in which domestic and international dual cycles promote each other.
“Compared with the new cotton on the market, the quality of the central reserve cotton is a little worse, and the price is much cheaper, which is just right. It meets the needs of textile enterprises for cotton distribution.”Analysts said that the rotation out and future rotation of cotton from the central reserve are mainly for structural optimization. At the same time, relevant agencies have also set a spot index critical price of 11,500 yuan/ton, which is also from another perspective. It shows that the purpose of rotation is to alleviate the structural demand contradiction in the market, rather than to suppress market prices. From a quantitative perspective, the upper limit of 8,000 tons per working day and a total of 500,000 tons should be based on the current cotton market situation. If the quantity is too large, it will have a more negative impact on the market; if the quantity is too small, it cannot meet the needs of textile enterprises. At present, although the COVID-19 epidemic is still spreading in many countries and regions, my country’s cotton and its downstream markets have been greatly affected, but this year’s domestic industrial and commercial inventories have not increased significantly compared with the previous year. Once the central reserve cotton is released, At the end of the period, industrial and commercial inventories will increase significantly year-on-year, and supply will be more abundant. The pattern of low and oscillating cotton prices will be difficult to change in the future.
Enhance the international competitiveness of cotton yarn
Deepen the supply-side reform of the cotton industry
In addition to alleviating the structural demand contradiction for cotton in the market, the rotation policy will also help enhance the international competitiveness of my country’s cotton yarn. Since May, the price advantage of foreign cotton yarn has continued to show, and my country’s cotton yarn companies have faced greater external pressure. In May, the price of foreign cotton yarn was generally lower than the price of related varieties of cotton yarn in my country. The average price difference was around 114 yuan/ton. In June, the gap widened to 485 yuan/ton. With the start of the cotton reserve rotation, my country’s textile enterprises will have the opportunity to purchase more cost-effective cotton resources, so that my country’s cotton yarn can gain market competitiveness in the process of competing with foreign cotton yarn.
In addition, experts believe that the rotation policy is a further deepening of the supply-side reform of the cotton industry in the new situation. The spread of the COVID-19 epidemic is currently accelerating, overseas clothing consumer markets are struggling to recover, and my country’s cotton industry is relatively weak both upstream and downstream. How to cultivate new growth points and connect the upstream and downstream cotton industry chains has become the top priority of the current cotton economic work. The 2020 central cotton reserve rotation policy, based on the potential demand of the cotton market, starts from the supply side of the cotton market, and through time window planning, price mechanism design and market protection measures, will effectively unblock the cotton industry chain and activate the upstream and downstream of the cotton market. For the textile industry chain that is currently sluggish under the influence of the global epidemic, China, as the world’s second largest cotton producer and largest consumer, this policy release is more significant in that it plays a positive role in guiding the market to recover. . </p
