NY futures continue to move sideways this week

We believe that there is reason to be less optimistic on Chinese imports this time around, because the Chinese government seems to be more determined to put a halt to these ever increasing stockpiles.

The Reserve officially launched a new round of sales auctions, offering stocks from the 2011/12-season at a base price of 18’000 Yuan/ton. Unlike this summer, when sales auctions were sweetened by a 1-for-3 import quota, there is no such deal available under the current program. The government’s reasoning seems to be that by offering reserve cotton at a cheaper level than this summer, mills will more or less get the same average price as under the 1-for-3 scheme.

Chinese import quotas are probably going to be limited to the TRQ (4.1 million bales) and possibly a few smaller processing trade quotas next year. However, there is still the possibility to import cotton outside the quota system by paying the full 40 percent tariff rate, although there have been rumors that the government may consider closing this ‘loophole’. But as long as these imports are allowed, they will act in support of international prices at around 82/83 cents landed China.

So where do we go from here? It is no coincidence that the market is currently stuck at this level. Even without any additional quotas we should see Chinese imports reach a minimum of 10 million bales this season and if international prices were to drop any further, buying against the 40 percent tariff would add to this number.

Since we estimate the seasonal surplus in the ROW at around 12.5-13.0 million bales, ending stocks are therefore not expected to increase by much, if at all. In other words, we have a stalemate from which the market seems to be unable to escape anytime soon. If prices rise, there will be enough cotton on offer to cap the rally and if prices drop by more than a few cents, Chinese buyers will come to the rescue.

With speculators on the sidelines, it will take a significant change in the fundamental outlook or some macroeconomic event to force the trade’s hand. Potential catalysts that come to mind include the new Chinese price policy for 2014/15, major shifts on the currency front, China disallowing imports against the 40 percent tariff or Chinese imports once again beating expectations. However, as things stand today, we are afraid that we are going to see a lot more of this boring trading action in the foreseeable future.

Plexus