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NY cotton futures leap over holiday period

07 Jan '12
5 min read

In other words, there are still some 20 million bales in available supply outside of what the Reserve currently owns, which means that there is enough cotton left to supply mills until April or May, even if the Reserve were to absorb another 3-4 million bales over the coming weeks.

Although many of the battered textile markets should continue to recover under China's high price umbrella, the boost the market is desperately waiting for are Chinese import quotas. If we look at the statistical picture outside China based on the latest USDA numbers, we have beginning stocks at 33.9 million, production at 89.9 million and consumption at 66.3 million bales.

In other words, the world outside China produces 23.6 million bales more than it needs this season and on top of that it has beginning stocks that cover six months of consumption. Not a pretty picture! What the market is hoping for is that all this Reserve buying will translate into massive import quotas, which would help to mop up most of the excess supply in the rest of the world.

Although we have no doubt that China will be a strong importer this season, the question is when and how much? As we have shown above, China still has enough cotton to last its mills until well into the second quarter, which is around the time planting decisions are made.

The market may therefore need a lot of patience. Also, there is no guarantee that China won't release some of its Reserve cotton back into the domestic market, which would mean fewer imports than expected.

So where do we go from here? China is clearly at the control switch at the moment! Without sizeable import quotas from China the market will probably struggle at current levels, because there is simply too much cotton around. However, traders seem to anticipate that import quotas will be issued at some point and short sellers are therefore cautious not to get caught in a trap.

Also, from a technical point of view the market held and rallied off of an important long-term support area in the low 80's, which suggests that a major bottom may be in place. Speculators seem to favor the long side at the moment, but are not entering in any big way as can be seen by the lack of new open interest.

Index Funds will have some rebalancing to do, which should add a few thousand contracts to their net long position, while the trade is unlike to engage in any large positions at the moment. To us it all adds up to a continuation of the sideways trend the market has essentially been in since the middle of July.

Plexus Cotton Limited

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