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Spread between Chinese cotton futures & spot may fall
14
May '12
Currently, the most active cotton contract at the Zhengzhou Commodity Exchange has fallen below important support level of 21,000 Yuan per ton.

The state is cautious towards issuing additional cotton import quotas. The current spread between cotton futures and spot is still large.

Additional import quota is not conducive to smooth outflow of positions in cotton futures.

Futures price is expected to gradually move closer to spot cotton, in case the spot market sees no significant improvement.

With greater impact of price difference between futures and spot, as of the end of April, cotton futures positions were four times of the positions over the same period last year, equivalent to 157,560 tons.

Cotton grade 428 accounted for 78 percent of total futures positions. Cotton grade 4 could be sold at about 19,800 Yuan per ton, if the cotton futures would be delivered in May, while corresponding quality cotton in spot market was traded at less than 19,000 Yuan / ton.

Now the price difference is still high, spot price will have limited space for increase, if there is no expectation for cotton shortage by the end of the year, so, futures price will obviously lack support.

From August 1, 2012, cotton futures position has added 4 Yuan / ton premium on a daily basis.

When entering delivery period in September, another premium of 150 Yuan / ton would be required on top of settlement price.

Now, the spread between May and September contracts is not conducive to rollover positions to forward months, therefore, a large number of positions will flow into spot market in May to September.

This will force futures price to move closer to spot price.

Fibre2fashion News Desk - China

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