Chinese cotton may stay weak, but short-term rebound possible

On last Friday, ZCE cotton September 2024 contract settled at 15,230 Chinese yuan ($2105.92) per ton, July 2024 contract at 15,085 yuan ($2085.57) per ton and May 2024 at 14,980 yuan ($2071.35) per ton. According to market analysts, the market fundamentals are weak, characterised by steady supply amid flat downstream demand. This scenario suggests limited potential for a rally. Despite the weak fundamentals, cotton prices are likely to find rebound in the short-term as negative factors subside.

Cotton textile industry’s purchasing managers’ index (PMI) was at 40.60 in April, a significant drop of 12.15 per cent from the previous month, indicating a contraction in the industry. The new orders index saw the largest decline, reflecting reduced activity in the textile and apparel sectors both domestically and internationally. This decline underscores the weak demand environment and limited boost to terminal consumption. However, inventory levels at gauze factories remain neutral, neither significantly high nor low.

In the main Chinese cotton-producing area of Xinjiang, temperatures have been higher than usual this year, which has positively impacted the growth of cotton seedlings. Therefore, the yield is expected to increase despite a slight reduction in the overall planting area contributing to the stable supply. On the other hand, downstream industry demand remains tepid.

The domestic cotton supply is increasing in stages. Current year’s sales progress is at about 60 per cent indicating a steady but not rapid pace of movement in the market. The imports of cotton in China are on the rise, with a high probability that the quota for foreign cotton in port bonded warehouses will increase. This influx of foreign cotton is likely to put downward pressure on domestic cotton prices and sales as competition intensifies.

Yarn mills, both domestically and internationally, are experiencing a shortage of orders. Demand in the market is driven more by intermittent, phased replenishment rather than consistent and robust consumption. This is indicative of a cautious approach by buyers, possibly due to economic uncertainties or fluctuating cotton prices.

Fibre2Fashion News Desk (KUL)