NY futures continue downward trend

10 Jul '10

6 min read

We therefore suspect that China's domestic consumption may be quite a bit higher than the current numbers give it credit for. Recent yarn output data seems to point in that direction as well. In May there were 2.335 million tons of yarn produced according to the National Bureau of Statistics and for the Jan-May period the aggregate amount was 10.213 million tons, which calculates to a yearly total of 24.5 million tons. Even if the ratio of cotton in the spinning system had dropped to just 50%, it would still amount to well over 12 million tons. Of course there is always some doubt as to the accuracy of this data, but combined with some of the other clues (record price/stocks release/imports) it does point to a higher consumption number.

The USDA has Chinese mill consumption for the current season at 9.8 million tons (after "loss" adjustment) and projects an increase to 10.1 million tons in 2010/11. Based on these consumption numbers the production gap in China amounts to just 2.7 million tons this season and 2.9 million tons next season. So why would China have to flush the marketplace with 5 million tons of extra supplies (2.6 Reserve stocks/2.4 imports) this season if it started with 4.9 million tons in beginning stocks and only had to cover a production gap of 2.7 million. Wouldn't imports have been more than sufficient to make up for the difference? Needless to say, we have some trouble believing the Chinese consumption and ending stock numbers, but it may take a while before the facts are reflected in the statistics.

So where do we go from here? A bigger US crop and weak technical signals are keeping potential buyers on the sidelines for now. The bulls are trying to hang on to support near 74 cents (lows of March 31 and June 7) and have so far managed to do so on a closing basis. A break of this support would open the door for a move down towards 68.50-69.00 cents. Also, the fact that July has left the board at a 456 points inversion to October and 786 points to December will create a gap on the weekly continuation chart, breaking below its long-term uptrend line. In other words, the market has a lot of work to do before the trend turns back up.

Fundamental traders are waiting for tomorrow's USDA report before making further decisions. We believe that a slightly bearish report is already discounted in the market, but if the US crop shows a number of over 18 million, buyers will continue to stay away.

The market will have to find a level at which both fundamental and technical traders are willing to step back in to generate some bullish momentum. But don't hold your breath - there is a reason why they call it the summer doldrums.

Plexus Cotton Limited

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