So where do we go from here? With China giving us no indication that it is shying away from cotton or yarn imports anytime soon and with mills in most markets enjoying decent margins, we don’t see the trade pressing the short side at the moment. We even get the impression that many mills are starting to look for more extended coverage at current prices levels since yarn orders are encouraging. With speculators once again on the wrong side of the market, it will not take much to trigger another round of buy stops, similar to what we saw happening a month ago. The trade would probably be there again to sell into such a rally! We therefore see near-term prices in a range between 68 and 78 cents!
In the longer term a lot will depend on how China deals with its exorbitant stockpile. To us the most likely scenario is for China to lower its cotton production over the coming years and supplement it with stocks from the Reserve. Although this may lead to a slowdown in Chinese imports, the impact on international prices may not be as dramatic as some people fear, because acreage reductions in the rest of the world will likely lead to much smaller seasonal surpluses.
Plexus Cotton Limited