The current cotton market and the warm market conditions during the cold winter period before the Spring Festival are completely different markets. Before the Spring Festival, the Sino-US trade dispute eased, which added a lot of confidence to the market. However, after the Spring Festival, affected by the sudden new coronavirus pneumonia epidemic, the market took a sharp turn, and cotton prices continued to fall by the limit. Although the domestic epidemic has been greatly controlled and alleviated, the outbreak of the epidemic abroad has caused a large number of European and American orders to be canceled, and cotton prices have once again fallen back to near the lows of 2008 and 2015. The author tries to analyze the current market operation logic to see if he can find out some future market development directions.
Cotton active months (data source: Wind)
Supply and demand. The current market focus is on demand. With the development of the epidemic in Europe and the United States, orders for non-daily necessities other than medical care and food have been canceled in large numbers or even close to zero. Spinners that previously exported have begun to turn to the already crowded domestic market, leading to a short-term price war. Rather intense. However, the good thing is that the current inventories of yarn mills are relatively normal. This is related to the previous trade dispute that lasted for nearly two years. The inventory control of large-scale yarn mills is relatively good. However, if orders cannot be restored for a long time, it will have a negative impact on corporate liquidity. Greater pressure. At the end of February, my country’s commercial inventory was 4.9726 million tons, slightly higher than the same period last year, but the destocking effort was not enough; industrial inventories were lower than the same period last year; as of March 31, Zhengzhou warehouse receipts and cotton forecasts were nearly 1.66 million tons, and the market supply was sufficient.
With relatively stable supply, when demand recovers is the key to determining the market. Judging from the data, the epidemic in Europe and the United States is in a period of rapid growth. Although major countries are in a state of lockdown and the probability of continued spread of the epidemic has dropped significantly, taking into account differences in social ideologies, the foreign epidemic is expected to return to normal from May to July, and new orders are expected to be generated in From May to June, taking into account financial factors and policy factors, it is not ruled out that the bottom of commodities will be earlier than this time. This is clearly reflected in the monthly price difference of Brent crude oil.
Situation of substitutes. The price impact between the chemical fiber industry and cotton is relatively large. It is expected that the entire polyester production capacity and TA production capacity expansion in 2020 and 2021 will be relatively large, both planned and actual. As of now, the polyester production capacity is 58.18 million tons and the TA production capacity is 58.22 million tons, and the TA production capacity will still grow at a large scale in the next two years. Under the premise of limited growth in overall fiber consumption, the substantial expansion of polyester production capacity will have a crowding-out effect on alternative cotton consumption, which will affect market operations in the next two years.
The current price ratio between cotton yarn and polyester is at a historical high, and polyester filament inventory is also at a historical high. As of last weekend, the entire filament inventory was 110 days, which is higher than the previous 2013 and 2014 103 days after the peak of the same period last year, filament processing profits also fell to the lowest point since 2016. Short-term inventory pressure is greater, but the advantage is that short fiber inventory is relatively stable.
New cotton planting. The triennial target subsidy policy has been introduced, and the target price of 18,600 yuan/ton will provide good support for stabilizing the cotton planting area in Xinjiang. However, considering that the September contract price of Zheng cotton is less than 11,000 yuan/ton, it means that the national finance needs to spend about 38 billion yuan. In theory, for every price increase of 1,000 yuan/ton, fiscal expenditure will be reduced by 5 billion yuan.
Policy aspects. Last week, the Standing Committee of the Political Bureau of the Central Committee mentioned that macroeconomic policy adjustment and implementation should be stepped up. At present, the United States has implemented a record stimulus policy, Europe has also taken similar actions, and Japan has recently submitted a bill on the granting of interest-free loan subsidies. The overall stimulus is still dominated by monetary policy.
OTC funds. The current main players in market transactions include: basis traders and speculative funds. Calculation data shows that speculative funds have certain floating losses, but there are still more funds outside the market that have not yet entered the market. Basis traders are passive receivers of prices, while speculative funds are the leaders in initiating market movements.
In summary, the current market demand is not ideal, and it may take 3 months or even longer for orders to gradually recover. The current market trend is quite emotional. With the convening of my country’s two sessions, the government’s support policies for enterprises have been introduced one after another, and prices will see a big improvement after the market demand for stocking recovers. </p
