2016/17 Will Continue To Cut Production, And Market Available Cotton Will Be Further Reduced.

This year,

The market is unusually hot.

In the case of continuous dumping and storage, the market is still out of a wave of rising prices, mainly due to the shortage of market spot and the resonance result of poor storage.

The dumping and storage in the remaining time will be particularly important for the subsequent market.

Next year, China's cotton will continue to cut production, plus the impact of rotation.

The supply will be further reduced.

Considering the reduction of production, rotation and seasonality, cotton is expected to be better in the far months. Investors can configure cotton bulls at the appropriate price as hedging, and should avoid the policy risks brought about by the next year.

Investment points

Supply side - domestic cotton output continued to decline in 2016/17, and supply gap expanded compared with the current year.

Consumer side -- the overall situation of downstream textile enterprises has improved compared with previous years.

Domestic and foreign spreads widened, and the substitution of domestic yarn for imported yarn is expected to continue.

Summary of dumping and storage - the beginning of the first half of the year is the delay of throwing storage, and the second half of the year will continue to focus on the impact of dumping and storage.

After market recommendations, from the perspective of production reduction, rotation and seasonality, investors can configure cotton bulls at appropriate prices as hedging.

1. cotton Market Review

Figure 1: Zheng Mian 1609 contract (yuan / ton)

Cotton is undoubtedly a bright star this year.

At the end of February, after 1 months of innovation, the consolidation took place for the first time in the first half of April. In the early April, due to the delay of throwing storage time, the commercial inventory caused by superimposed reduction was low, triggering market take-off.

Even if we confirm the time and details of the dumping, the cotton will go up only after a few callbacks.

From the tight spot to the important fundamentals, it supports the rise of spot price and futures price, and the rise of both increases the price of dumping and storage, and because of the lack of spot, the turnover rate is high, and also promotes the rise of spot and futures. At this point, a price pmission path is completed.

Recently, downstream textile enterprises have frequently increased textile prices, and prices have been better downstream than earlier ones, and the pressure from downstream enterprises has weakened.

In the course of throwing and storing, if the dumping is not allowed and the positive feedback on the fundamentals is good enough, cotton is still not weakening.

Cotton supply and demand in 2.2016/17

2.1. domestic cotton supply and demand balance sheet

In recent years, affected by policies, cotton yields have declined sharply, and cotton planting area has dropped significantly, affecting output.

China has been reducing production for 4 consecutive years since the beginning of 2012/13, and for the 2016/17 production forecast, it will still be a year of reduction.

Fig. 2: cotton production and import volume (10000 tons) in China

On the supply side, the total cotton output in 2016/17 is estimated at 4 million 470 thousand tons.

The import volume will decrease slightly due to the impact of the policy of dumping and storage this year. The import volume of 2016/17 is estimated to be 900 thousand tons (WTO[micro-blog) 89.4, 1% tariff.

Therefore, the total supply of 2016/17 is expected to be 5 million 370 thousand tons.

On the consumer side, consumption is projected to be 6 million 890 thousand tonnes in the next year.

Compared with the supply gap of 1 million 420 thousand tons in 2015/16, the supply gap in 2016/17 expanded further from 130 thousand tons to 1 million 550 thousand tons.

Table 1:2016/17 domestic cotton supply and demand balance sheet (10000 tons)

2.2. new cotton concentration

The supply of cotton has obvious seasonality. On the one hand, China's cotton picking began in September, and the first 2 and 3 months of picking were also focused on the listing period, that is, a large number of new cotton concentrates before and after January. On the other hand, the progress of public inspection will also affect the supply of cotton. From the annual public inspection situation, the average progress of public inspection is 91.68% as of January, and 99.69% as May.

It is believed that the volume of cotton inspection is mainly between September and January of next year, and the supply of new cotton is also concentrated in this period. The market supply of cotton is the most abundant.

Fig. 3: progress of new cotton inspection in recent years (%)

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2.3. seasonal commercial inventory

From the perspective of commercial inventory, China's cotton usually has a peak from December to February of next year. Then, with the decline of the public inspection volume and the continuous demand of the downstream, the commercial inventory after February has been decreasing, and the low level of business inventory has appeared at the end of the year.

Taking 2015/16 as an example, although the reserve supply increased the supply in the short run of the market, the market was still in tight supply because of the problem of outgoing inspection, and the commercial inventory in May was the lowest level in the past years (excluding the year of storage and withdrawal).

Moreover, it is assumed that there will be no fundamental improvement in the outgoing inspection situation in the next 7 and August, which will strengthen the market's anticipation of the sluggish storage in the next year.

Figure 4: cotton inventory in China over the years (10000 tons)

Therefore, from the point of view of reducing production and supplying the seasonality, we expect the whole month to be better than in the near future.

3. downstream textile enterprises on the future market impact

Before 2013, because of the domestic purchasing and storage policy, the cost of spinning cotton was high and the market competitiveness was lost.

After that, with the change of policy and the anticipation of the market, the price of cotton fell, the cost of spinning enterprises decreased, and the profit margins recovered.

But with the throw of storage this year, the price of cotton has risen sharply, and the textile enterprises have been cautious in purchasing cotton.

Later, downstream textile enterprises difficult to cotton problem will affect the specific market?

Overall situation of downstream textile enterprises in 3.1.

In the past year, cotton prices have experienced a historical downturn, and the profit margins of textile enterprises have been restored. The overall situation is improving.

But in June, the purchasing managers index (PMI) of China's cotton textile industry was 47%, down by 8.7 percentage points from the previous month, to 50% below the withered line, and in June, the five sub indexes of PMI showed a downward trend, mainly due to the low season of textile industry.

Figure 5: spinning enterprise PMI and other important indicators (%)

Figure 6: spinning enterprise PMI seasonality

Generally speaking, the PMI of textile enterprises appeared low in July, and then rebounded.

In the second half of the year, including the Mid Autumn Festival, the Spring Festival and other festivals, there will be a traditional peak season before the festival, especially in the early spring festival.

This year, coupled with the fall in cotton prices, the cost of spinning enterprises has been reduced by cotton. The market which was originally occupied by imported yarns has been recovered by domestic yarn. In the traditional peak season of the second half of this year, the improvement of textile enterprises is better than that in the same period of history.

3.2. cotton yarn profit improvement

For many textile enterprises, this year is a turning point. Due to the overall decline in cotton prices, the trend of cotton yarn profit tends to rise.

The profit of textile enterprises in recent years has been maintained at around 1000 yuan / ton, although profits will be reduced due to the rebound of cotton prices in the later stage (the use of cotton in production is delayed), but the price adjustment of textile enterprises in recent years is also very positive. Price pmission is more smooth than before, which will form positive feedback on the raw material market.

Figure 7: 32S profit estimate of textile enterprises (yuan / ton)

With the rise of international cotton prices, the price of imported yarn has also risen. Since the beginning of this year, the import yarn profits of 32S have disappeared.

By the end of May, a total of 1 million 551 thousand and 300 tons of cotton yarn had been imported this year, with a total import volume of 1 million 707 thousand and 900 tons in the same period last year, down 9.17% from the same period last year.

The decline of imported yarn has verified the recovery of competitiveness of China's domestic yarn market.

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Fig. 8:32S price difference of cotton yarn at home and abroad (yuan / ton)

Figure 9: Cotton historical import volume (10000 tons)

On the whole, the environment of downstream textile enterprises is improving.

Among them, the inversion of the inside and outside spreads of cotton yarn and the recovery of profit make the replacement of domestic yarn to import yarn is expected to continue, and also the textile enterprises' ability to bear the price of raw materials has been improved. In addition, the downstream price pmission is obviously better than before, and the restrictions on the rise of cotton have shifted upward.

4. summary of dumping and storage

4.1. throwing storage situation this year

In May 3, 2016, cotton throwing and storage were opened. As of July 15th, a total of 1 million 339 thousand and 300 tons of national cotton reserves were sold, with a turnover rate of 98.45%, and the stock of state reserves dropped to 8 million 650 thousand tons. In accordance with the plan this year, 660 thousand and 700 tons of national cotton reserves will be thrown.

From the current market turnover rate, the remaining planned reserves will be completed before August 31st.

It is necessary to wait for publicity after adding or dropping the storage.

Due to the delay in throwing storage time this year, commercial inventories are at a low level. Unexpected cotton traders, together with traders participating in the national auction, resonate with all kinds of reasons.

Figure 10: the surplus of national reserves (ten thousand tons) by the end of July 15th

Chart 11: closing of July 15th as a result of dumping and storage

Judging from the current turnover rate of 100%, there is indeed demand for cotton in the market, but at present, the increase in futures has been out of the fundamentals and more due to the promotion of capital.

The subsequent market will be unloaded if the reserves are sold out, and the support for the term price will be interrupted. The cotton market will face a price correction.

4.2.'s conjecture on rotation

According to the announcement, the State Reserve will start the round as the case starts after the current round of dumping and storage. The rotation time is from September to February of next year, and the number of rounds will not exceed 30% of the round reserves. According to the current estimated speed of dumping and storage, the current round of reserves will be able to reach 2 million tons of the plan, and the maximum turn in volume is 600 thousand tons. Then the market supply after February will be reduced by 600 thousand tons due to the turn in.

This will further reduce the supply of cotton on the market next year.

In addition, this year's sluggish market has strengthened the anticipation of the current market's sluggish sales in the next year. Therefore, from the perspective of production reduction, rotation and seasonality, cotton fundamentals will be better than in the near future.

5. outlook

This year's storage will end in August 31st, with a month and a half left.

Despite the recent increase in cotton daily throwing reserves to 30 thousand tons, the turnover rate remained at 100%, not falling, and the paction price remained high.

This has played an important role in supporting the market.

Whether or not the future can sustain such a dumping state will have an important impact on the price and the expectation of the next year.

If the amount of storage is thrown, the market will form a new pressure. In addition, the smoothness of the storehouse will also affect the market.

At present, the policy attitude is still ambiguous, which brings imagination to the future market.

From the supply side, 2016/17 will continue to be a year of production reduction. In the year of reduction, the market will be able to further reduce cotton because of the impact of rotation. From the demand side, the competitiveness of domestic yarn to import yarn will continue to recover, and the downstream textile enterprises will be better and need more cotton.

Cotton production is expected to be better in the long run than in the month when production cuts, rotation and seasonality are taken into consideration.

But in the next year, it will be a policy risk to throw or store up cotton prices.

At present, due to the sluggish impact of this year's dumping and storage, the market is not expected to sell stocks in the next year. Investors can finish the cotton market long before the market is expected to change or the next year's rules will be announced.