The COVID-19 epidemic has spread and escalated in more than 140 countries, and global economic growth expectations have been significantly lowered. Countries have cut interest rates to cope with the impact of the epidemic, but the effect is still not obvious, and the financial market has suffered a bloody storm. Under the overwhelming influence, cotton, which has not yet recovered from the cold winter, became one of the worst-hit varieties. In less than a week, Zheng Cotton’s main 2005 contract plummeted by more than a thousand points, hitting a new low in the past four years.
The vitality after the trade war has not yet recovered, and the epidemic is adding salt to Zheng Mian’s wounds
The impact of the Sino-US trade war on Zheng Cotton’s market began in June 2018. In the next year and a half, the market repeatedly discussed the shrinking domestic textile and clothing exports and the reduction in cotton demand. Cotton has been falling all the way, and the 01 contract fell below the 10,000 mark at the end of September last year. It was not until China and the United States reached an agreement on the text of the first phase of the economic and trade agreement that the market atmosphere really began to improve. It was originally thought that Zheng Mian could start an undervalued repair market this year, but unexpectedly the “black swan” of the new coronavirus pneumonia epidemic broke out. This time it was still a drag on prices from the consumer side.
Under the epidemic, global economic concerns have intensified. Because cotton has a relatively large consumption elasticity, the economic impact will be more severe. Domestic textile companies delayed the start of production after the Spring Festival, orders were delayed, and textile and clothing exports have declined sharply. According to customs data, my country’s textile exports fell by 19.9% year-on-year from January to February 2020, and clothing exports fell by 20%. At present, the domestic epidemic is under control, but the overseas epidemic is still fermenting. It is expected that domestic textile and apparel exports will most likely suffer losses for a period of time. In 2019, China’s apparel exports to ten countries including Italy, South Korea, Japan, France, Germany, and the United States totaled US$76.6 billion, accounting for 55% of China’s total apparel exports. The epidemic in these countries has recently shown an accelerated spread.
Zheng Mian keeps falling through the cost line. How deep can this pit go?
The average processing cost of machine-picked cotton in Xinjiang this year is around 12,000 to 13,000 yuan/ton. Under normal circumstances, many investors would think that the price of Zheng cotton bottoms out at around the 10,000 mark. But it should be noted that short-term prices are determined by supply and demand, and long-term prices are determined by costs. Cost is the intrinsic value of a contract type. When short-term risks are greater, the bottom of the market price becomes more difficult to measure using cost. Looking back at the first quarter of 2016, Zheng Mian’s main contract at that time fell below 10,000, while the spot price was around 12,000 at the same time. This was just because the futures market expectations were poor and the futures discount was too large.
Although the cost line does not have much reference significance for the short-term price bottom, the vicinity of the cost line will still play a certain supporting role. At the same time, the State Reserve cotton has increased its rotation volume. The maximum price limit for this week’s rotation is 12,901 yuan/ton. The average transaction price on Monday was 12,900 yuan/ton. The purchase and storage also limits the downward space of Zheng cotton to a certain extent. Judging from the current situation this year, the negative sentiment caused by the epidemic continues, the global market is in a mess, domestic cotton stocks are high, and the demand outlook is poor. It is difficult for Zheng Cotton to reverse the situation in the short term, but speculation about the bottom space should not be overly pessimistic.
After the global epidemic risk is released, Zheng Cotton may return to the supply and demand game. After the global economy suffered a heavy blow, the demand side will also focus on the recovery speed and extent of domestic downstream orders. Import and export tariffs and other issues also deserve attention. The supply side may provide greater opportunities for Zheng cotton. USDA predicts that the global cotton planting area will decrease by 4% year-on-year in the new year. According to domestic surveys, the cotton planting area in Xinjiang and other places also declined compared with the previous year. In addition, there are also potential speculations such as weather and locusts during the sowing period, which may become important factors for Zheng cotton price fluctuations. </p
