Introduction
From the current perspective, the spread of the epidemic, the collapse of crude oil and the huge warehouse receipts are the three big mountains that suppress the Zheng cotton market, which also determines that the downward trend is difficult to change. As time goes by, these negative factors will change and dissipate one by one.
Cotton trend speculation: The turning point of the overseas epidemic will appear as early as mid-April, global loose monetary policies will ferment in the second half of the year, and cotton consumption has also entered a stage of recovery and growth. By then, the textile trade between China and the United States will become active again. The decline in crude oil may bottom out in April, and it is not ruled out that the crude oil price war will end early.
So how to digest the huge cotton warehouse receipts? This will require waiting until delivery in May. Therefore, we believe that the turning point in the Zheng cotton market will occur in late May. By then, the three major negative factors will have been basically eliminated. Entering April and May, the northern hemisphere enters the cotton sowing stage, and area, weather or pests and diseases will become the subject of speculation.
Interpretation of Zheng Cotton Market in the First Quarter
Taking the Zheng Cotton 2009 contract as an example, the highest point of the new year (14,855 yuan/ton) appeared on January 14, due to the improvement of Sino-US trade and winter stocking. Subsequently, under various negative pressures, the Zheng cotton market showed a perfect five-wave downward trend.
The first downward wave was from January 14th to February 4th. The main reason is that the pressure on hedging orders has increased, and registered warehouse receipts have reached one million tons; subsequently, the Wuhan epidemic gradually emerged and triggered a limit drop on the first trading day after the holiday. At that time, the lowest point was 12,650 yuan/ton, a decrease of 2,205 yuan/ton (-14.8%).
The second wave of decline started from the highest point on February 17 (13,985 yuan/ton) and reached the lowest point on March 2 (12,580 yuan/ton). tons), a decrease of 1,403 yuan/ton (-10.0%). The reason for the decline is that the overseas epidemic has spread slightly and the market has panicked.
The third wave of decline began on March 5, when the high was 13,320 yuan/ton. Later, under the pressure of the plunge in the crude oil market, the global epidemic, and the huge hedging warehouse receipts, the Zheng cotton market accelerated its downward trend. So far, we are still looking for bottom support.
From a technical point of view, the most effective strong support is: the extreme low of 9890 yuan/ton formed in March 2016. From a fundamental perspective, Zheng Mian started with extreme events in 2020. The outbreak of the global COVID-19 epidemic and the disintegration of the crude oil production reduction alliance are all unexpected factors. The only major negative that is certain is: huge registered warehouse receipts. Where will the Zheng cotton market go in the future?
Important events affecting the cotton market in time
1. Overseas When will the impact of the spread of the epidemic and the crude oil price war dissipate?
As far as the Zheng cotton market is concerned, after the start of the new year in 2020, the market has been hit by a series of “black swan” events.
First, the domestic COVID-19 epidemic broke out during the Spring Festival. Under strong government control, the domestic epidemic is currently basically under control. This is true to the traditional Chinese proverb: the plague breaks out at the winter solstice, flourishes at the beginning of spring, and declines at the start of the Waking of Insects. Some people estimate that due to the outbreak of the epidemic and the delay in resumption of work, domestic cotton demand will decrease by about 500,000 tons. This factor has already been reflected in the market decline.
Then the epidemic spread overseas. At present, the United States, Western Europe and Iran are in a period of outbreak, and the situation is still deteriorating. Recently, US President Trump announced a ban on Europeans traveling to the United States to curb the spread of the coronavirus. It is foreseeable that the world’s major economies (except China) will stagnate or even go into shock in March and April; this will cause global cotton consumption to shrink. So, as the overseas epidemic spreads, how much will global cotton consumption decrease? At least more than 1 million tons.
Furthermore, the OPEC+ production reduction alliance has broken down. This caused the crude oil market to collapse, with prices falling to historic lows. In this way, the collapse of chemical fiber costs will inevitably drag down cotton prices. However, this impact is temporary and is expected to be digested in mid-to-late April.
Although the overseas epidemic has not yet been effectively controlled, as the temperature in the northern hemisphere rises, the infectivity of the virus will be greatly reduced. It is estimated that the global epidemic will eventually subside around May. By then, the global economy is expected to shake off stagnation and gradually enter a stage of comprehensive recovery.
At this stage, the market’s attention is focused on the above two major negatives. However, we should not forget that China and the United States reached a “phase one” agreement in December 2019, which is a potential long-term strategic positive factor. According to the agreement, China will import a large amount of U.S. agricultural products in the next two years. Once the overseas epidemic is under control, this positive factor will gradually appear.
2. How to resolve the huge amount of registered warehouse receipts?
As of the end of February, the national cotton commercial inventory was 4.9 million tons, a decrease of 104,000 tons from last month. This inventory is still at a historically high level. It can be said that the expansion of commercial inventories is the result of years of accumulation, and also includes the transfer of part of the state’s cotton reserves.
Judging from the registered warehouse receipts of Zheng Cotton, as of March 19, there were 35,160 registered warehouse receipts of Zheng Cotton, equivalent to approximately 1.4 million tons of cotton! Except for a small amount of old cotton that was written off at the end of March, most cotton will be delivered on the 2005 contract. By then, the huge warehouse receipts will be delivered in mid-May, or part of them will flow into the spot market, or they will continue to be sold on the 2009 contract.
In May last year, due to the breakdown of Sino-US negotiations and the hugeThousands of tons. Production and consumption data reversed again, with a surplus of 747,000 tons, causing ending stocks to increase by 700,000 tons to 18.15 million tons, and the inventory/consumption ratio rose to 70.5%. If the outbreak of overseas epidemics is taken into account, then the reduction in global consumption will be even greater.
From a dynamic perspective, what will be the changes in output and future demand in the next year?
Last year, the increase in global cotton production mainly came from the United States (+310,000 tons) and India (+810,000 tons); next year, China, the United States, and India are all expected to reduce production , and even production was significantly reduced due to weather. In this regard, we need to pay attention to the sown area and weather factors in each country.
The reason why USDA lowered the consumption data is because of the previous trade war and epidemic factors. As the global epidemic dissipates, the economy recovers and consumption picks up, coupled with the results of Sino-US negotiations, the USDA may ultimately significantly increase global cotton consumption data in the second half of the year. </p
