Interviews
News Flash
Quite increase in New York cotton futures
03 Dec '11
6 min read
When we compare the price swings in the Chinese and the international market, we notice a striking difference. While the CC Index in China has dropped some 80 cents from its high of 215 cents earlier this year to its current price of 135 cents, the A-index has collapsed from a high of 243.65 cents to a current quote of 98.15 cents, a swing of over 145 cents or nearly twice as much as the CC Index. The futures market is not far behind the A-index, with a difference of around 136 cents.
While international prices have been overshooting Chinese prices on the way up, they were also dropping much more significantly on their way down. In fact, the A-index is currently about 35 cents below the CC index, while March futures are about 44 cents lower. This price relationship has stretched way beyond the historic norm and is therefore likely to snap back at some point.
The question of course is in what manner? Since China seems to be digging in at the government support price, willing and able to absorb a massive amount into its Reserve, it is unlikely that Chinese prices are going to fall significantly anytime soon. If this assumption is correct, international prices may start to recover, because mills in other parts of the world will eventually gain an edge over their Chinese counterparts. The fact that Chinese yarn imports have shot up significantly over the past couple of months seems to point in that direction.
So where do we go from here? Although the physical market remains depressed and lower prices appear to be a certainty, the wide price gap between China and the rest of the world is starting to open up arbitrage opportunities along the supply chain. The market is currently bearing the brunt of the Northern Hemisphere crop pressure and the longer it can withstand this pressure - with the help of Chinese buying - the better the chances for a rebound as we progress deeper into the season.
Macroeconomic developments will also continue to play a major role in the pricing of cotton as we move forward. After disappointing German and Italian bond auctions last week, Central Banks around the globe have reacted by making it cheaper for lenders to borrow in US dollars. This is signaling to the market that Central Banks are standing by to inject more liquidity into the system to keep it afloat, which ultimately is inflationary. For this reason alone it may be dangerous to go short at current levels. As confidence returns, investors may once again hit the 'risk on' button and many of the specs that sold the market last week may return as buyers.
However, while the downside may be limited, the market won't find a lot of room to run to the upside either. The stocks that China is currently accumulating will prevent that from happening. It therefore all adds up to more sideways action in the months ahead.
While international prices have been overshooting Chinese prices on the way up, they were also dropping much more significantly on their way down. In fact, the A-index is currently about 35 cents below the CC index, while March futures are about 44 cents lower. This price relationship has stretched way beyond the historic norm and is therefore likely to snap back at some point.
The question of course is in what manner? Since China seems to be digging in at the government support price, willing and able to absorb a massive amount into its Reserve, it is unlikely that Chinese prices are going to fall significantly anytime soon. If this assumption is correct, international prices may start to recover, because mills in other parts of the world will eventually gain an edge over their Chinese counterparts. The fact that Chinese yarn imports have shot up significantly over the past couple of months seems to point in that direction.
So where do we go from here? Although the physical market remains depressed and lower prices appear to be a certainty, the wide price gap between China and the rest of the world is starting to open up arbitrage opportunities along the supply chain. The market is currently bearing the brunt of the Northern Hemisphere crop pressure and the longer it can withstand this pressure - with the help of Chinese buying - the better the chances for a rebound as we progress deeper into the season.
Macroeconomic developments will also continue to play a major role in the pricing of cotton as we move forward. After disappointing German and Italian bond auctions last week, Central Banks around the globe have reacted by making it cheaper for lenders to borrow in US dollars. This is signaling to the market that Central Banks are standing by to inject more liquidity into the system to keep it afloat, which ultimately is inflationary. For this reason alone it may be dangerous to go short at current levels. As confidence returns, investors may once again hit the 'risk on' button and many of the specs that sold the market last week may return as buyers.
However, while the downside may be limited, the market won't find a lot of room to run to the upside either. The stocks that China is currently accumulating will prevent that from happening. It therefore all adds up to more sideways action in the months ahead.
Plexus Cotton Limited
Popular News
Leave your Comments
Editor’s Pick
Esteemed Clients
-Ltd..jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Thermore (Far East) Ltd.")
.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Telangana State Industrial Infrastructure Corporation Limited (TSllC Ltd)")
.jpg?tr=w-120,h-60,c-at_max,cm-pad_resize,bg-ffffff "Taiwan Textile Federation (TTF)")
