China seems to have voracious appetite for cotton

22 May '10

5 min read

We were a bit surprised to see July open interest go up by about 2'000 lots to 105'897 contracts this week. With July First Notice Day only about five weeks away, we should see open interest decline, not go up. We feel that the 10.6 million bales of shorts are playing with fire given the tight supply situation we are in, although they will have an opportunity to get out during the upcoming index fund rolling period, when over seven million bales of July longs will get rolled into December.

So where do we go from here? For the last three weeks the July contract has spent most of its time trading between 80 and 83 cents, unable to break away to the upside but being well supported on weakness. The cotton market has been able to withstand the negative vibes emanating from outside markets and based on the strong physical demand we would not rule out a move higher over the coming weeks. The bearish case is mainly based on the certified stock and if this cotton were to suddenly disappear it would spark an explosive short-covering rally. We therefore feel that it would be prudent for anybody who is still short the July contract to get out of harms way and this includes the 2.1 million bales of unfixed on-call sales.

Plexus Cotton Limited

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