Chinese importers likely to become more aggressive after holidays
NY futures have traded sideways since our last report two weeks ago, with March gaining just 18 points during that period to close today at 73.90 cents.
The market's upside has been contained by a five percent rally in the Dollar Index and the reluctance by mills to pay up, while the downside seems to be very well supported by mill fixations and the fact that most mills remain short covered.
Since November 20, the market has essentially gone nowhere, closing between 73.48 and 76.25 cents, a range of just 277 points. With a few exceptions, volume has been subdued, although we have seen a steady increase in open interest as spec longs and trade shorts continued to add to their respective positions. Since the December liquidation open interest has grown from around 169'000 to 188'000 contracts, before the breach of near-term technical support on Tuesday flushed out some 4'000 contracts.
The latest CFTC snapshot as of December 15th showed speculators at 6.6 million bales net long and Index funds at 7.9 million net long, while the trade had a 14.5 million bales net short position. As we have mentioned before, this trade short is probably near its peak for the season because shippers are likely to reduce their positions gradually from here on as basis-long positions are being sold to mills in the months ahead. Some of these shorts will probably be replaced in the December 2010 contract, as growers in various countries are trying to lock in the current price level and the only way to do so at this point is with the help of the futures market.
We believe that current crop futures will eventually move above new crop, as the record production gap will manifest itself in the months ahead. However, we do not expect a flattening or invert of the board within current crop, as merchants will see to it that carrying charges get re-established between March and July. Anything else would prove to be rather costly to the trade with its 14.5 million bales futures short. The way to do this is via the certified stock, which is once again approaching the 400'000 bales level. We believe that the big block of de-certs we saw earlier this month is simply part of swapping old crop stocks for new crop to eliminate the crop year penalty. As of last week there were 9.5 million bales of the US crop classed, with nearly 70% or 6.6 million bales being of tenderable quality. In other words there is plenty of ammunition for merchants to force the spread out to full carry in the current crop.
This week China finally started to allocate TRQ (0.894 million tons) and 'sliding scale' (1.0 million tons) import quotas to mills. The release of these quotas almost seamlessly ties in with the end of the current state reserves auction, as only about 41'000 tons of the 500'000 tons remain unsold. Although the market has known about these import quotas for quite some time, we believe that its impact has yet to be felt as Chinese importers are likely to become more aggressive in the world market after the holidays.