It was therefore not surprising that the market rallied nearly 250 points over the last two sessions, boosted by what appeared to be a combination of spec buying and trade short covering.
There were a couple of reports that added to the bullish mood this week. First we learned that Chinese imports for December amounted to 2.7 million statistical bales (609’000 tons), which brings total imports for the first five months of the season to 6.43 million bales.
This means that China will only have to import 4.57 million bales over the remaining seven months of the marketing year to arrive at the current USDA estimate of 11.0 million bales. This seems certainly feasible considering that China has recently started to release its annual Tariff Rate Quota (TRQ), which usually amounts to around 4.1 million statistical bales.
The second report that got traders excited were US export sales for the week ending January 9. Even though most traders expected a number above 150’000 bales, the fact that net sales increased by 239’700 running bales took the market by surprise. Once again there were 17 different countries participating in the buying, with China, Vietnam and Indonesia leading the pack. Total commitments for the season are now at just under 8 million statistical bales, of which 3.5 million bales have so far been shipped.
It is quite obvious that most of these new sales were done ‘on-call’, since the latest CFTC report reveals a net increase in unfixed sales of 176’500 bales. Total unfixed on-call sales now amount to 5.08 million bales for current crop and 0.53 million bales for 2014/15. By leaving the price on so many contracts open, mills often defeat their own objective and ultimately end up paying higher prices.
We believe that the 12 million bales in unfixed on-call sales were one of the main catalysts that propelled prices to historic highs in early 2011 and we seem to experience similar dynamics this time around, albeit on a smaller scale.
Last Friday’s USDA supply/demand report did not contain any changes in the categories that matter most to international prices, as the ROW production surplus was little changed at 11.31 million bales and Chinese imports were left at 11.0 million bales. In other words, stocks in the ROW are expected to remain at more or less the same level as last summer.
From a psychological point of view the report may have been slightly bearish, since the USDA raised the Chinese crop by a million bales, thereby boosting global ending stocks to 97.61 million bales, of which 58.31 million are located in China.
However, for traders and mills scrambling to get their hands on cotton for nearby shipment it is inconsequential whether Chinese stocks are currently at 57 or 58 million bales. The disposal of a large portion of these stocks is something that will occupy traders’ minds over the coming three to five seasons.
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