Cotton market continues to perform remarkably well this week

30 Oct '09

5 min read

At the same time we have a Chinese economy that seems to be moving full steam ahead, which bodes well for cotton consumption. Most traders are now accepting the USDA consumption estimate of at least 43.75 million bales (46.25 million bales less 2.50 million bales "loss adjustment"), which equates to roughly 9.5 million tons and some sources even see Chinese consumption as high as 10 million tons. It is therefore not inconceivable that China could face a seasonal deficit in excess of 2 million tons.

Last season China decided to import only what was absolutely necessary and bridged any shortfall by offering its strategic stock to the local market. In doing so, it has reduced its strategic reserves by nearly 2.1 million tons since starting the auction process. China may still have another 2 million tons in total reserves and there is talk that another auction of around 0.6 million tons will be announced shortly. This would reduce the reserve to less than two months of consumption, a level the Chinese government surely can't feel very comfortable with.

We believe that China will be much more aggressive on imports this season, especially with a crop that is not yielding as many high qualities as usual. Internal prices have reached two-year highs this week and the government will have no choice but to step in and contain the situation. The USDA estimate of 8 million bales of imports may therefore prove to be conservative.

So where do we go from here? For now the market seems to be stuck between solid support at around 65/66 cents and strong resistance near 70 cents. Below this support there is an army of buyers waiting, including mills that still need to fix 5.3 million bales and merchants that may want to lighten up on their short positions. Near-term resistance comes from an increasing certified stock, which tries to take advantage of a futures market that is still several cents overvalued compared to the cash market.

Next week the December rolling period will get under way, which should guarantee some volatile, high turnover sessions. However, we don't believe that the market will break out from its current range before December gets off the board.

In the long run we still see higher prices ahead, as the statistical shortage and quality issues should lead to a stronger physical market, especially if China gets into the mix.

Plexus Cotton Limited

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