NY cotton futures under renewed pressure this week

20 Sep '14

5 min read

In the current season, the ROW is expected to produce a surplus of 12.9 million bales and in 2015/16, one may easily see this surplus drop to 6.5 million bales.

All it would take is for ROW production to drop by 5% to 84.0 million bales, while ROW mill use increases by 2.5% to 77.5 million bales.

Such a scenario is certainly plausible given the depressed price level and may even prove to be conservative. Therefore, as long as China keeps absorbing the diminishing ROW surplus, price pressure should not increase.

Chinese yarn imports, which are not subject to quotas, are another important factor to consider. Many traders believe that the drop in Chinese domestic prices will negatively impact yarn imports.

However, it is no secret that Chinese mills generally prefer imported versus local cotton, for quality reasons.

Therefore, if raw cotton imports become more restricted, mills may increasingly turn towards yarn imports.

Although the price difference between China and the ROW has narrowed considerably this season, it should still be enough to make yarn imports work.

13,500 Yuan/ton, which is where January futures are currently trading, equates to around 100 cents/lb and is 26 cents above the A-index, so it would not come as a surprise if yarn imports were to exceed expectations this season.

China’s subsidy announcement has reinforced the negative mood that has prevailed in the market since it started raining in West Texas nearly four months ago.

However, even though the bears are out in full force discounting, offering prices for January onwards, the nearby situation has not changed at all.

The pipeline is still empty and parts of the US crop are getting further behind due to rainy and cool conditions.

It will take another six weeks before traders have a better grip on what to expect in terms of quality and quantity.

Since the certified stock is all but gone, traders will think twice before shorting December at 64 cents or lower.

December is therefore acting like an obstacle to a more bearish scenario that follows behind it, which means that we may be stuck in a sideways trend for a while longer. (AR)

Fibre2fashion News Desk - India

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