Zheng Cotton Continued To Rise Four Days, "Crisis" Lifted?

Strong rebound, hard to change industry strong pessimistic atmosphere

Under the background of continuous escalation of Sino US trade frictions, cotton demand is not good. From the data point of view, if the United States raises taxes on all textile and clothing exports in China, China's cotton consumption will be reduced by 1 million tons. From the point of view of influence, the continuous escalation of Sino US trade disputes on China's cotton demand is reflected in two aspects. On the one hand, it is a psychological pessimistic effect. The psychological constraints of all sectors of the industry have been restricted. The channel inventory has continued to shrink. It can be verified from the side of the national storage spanaction rate and the sharp decrease in the output of Xinjiang cotton. On the other hand, the number of real consumption decreases and the pace changes. Over the past 4-5 months, the overall cotton industry showed a high level of finished goods inventory, significantly higher than the same period in previous years, and raw material inventory shrinkage was significantly lower than the same period in previous years. It is expected that in the short term before the end of the conventional textile off-season in July, the finished product inventory will continue to show an increasing trend. On the one hand, some enterprises are unable to stop the finished product inventory to the limit, on the other hand, the downstream will continue to shrink raw material inventory, and the cotton and cotton yarn procurement cycle will continue to decrease, such as the cotton purchasing cycle from about 2 months to 30 days or so, these two situations will lead to a reduction in cotton consumption.

As of the end of May 2019, the total inventory of cotton industry and Commerce in China was 4 million 280 thousand tons, a decrease of 300 thousand tons, an increase of 930 thousand tons compared with the same period last year. From the monthly consumption estimates of 2018/19, we expect that domestic cotton consumption will be reduced by about 6% in 2018/19. Even if we do not take into account the supply increment brought by the national reserve ship, 4 million 280 thousand tons can also be consumed for more than 6 months in the country, so the supply and demand of 2018/19 will be loose. At present, the market is waiting for the news of the G20 summit. It is prudent to replenishment and sales. If there is no good news at that time, there may be a discount in the peak season of conventional textile after July.

Far month contract premium, yield reduction + round rumours revive

Last Monday, when Zheng cotton was hanging upside down from the inside and outside cotton prices, and was now out of repair demand, the 01 contract rebounded at the highest 960 points with the help of Xinjiang cotton production reduction forecast and round of rumors. As of last Friday, it closed at 14100 yuan / ton, and the week rose 530 yuan / ton. According to the latest report released by the China Cotton Association, from the end of April, the rain and cooling weather in Xinjiang began to bring different effects on seedling emergence and seedling growth. As at the beginning of June, the crop growth period of most major cotton producing counties in southern Xinjiang was postponed 2-8 days compared with the historical average. However, the number of cotton production in 2019/20 is still unknown.

In addition to China's loosely anticipated supply and demand, according to the latest USDA6 month forecast, it is estimated that the total output of cotton in the world in will be 2728.5 tons, an increase of 1 million 400 thousand tons compared with the same period last year. The global cotton consumption will increase by 27 million 270 thousand tons, an increase of 650 thousand tons compared with the same period of last year, and the global cotton production will exceed 11 thousand tons. It is estimated that the global supply and demand of cotton will be basically balanced in 2019/20, and the production will be slightly larger than the demand. The world will continue to accumulate inventory besides China. The world's cotton production exceeds 2 million 880 thousand tons in addition to China, which means that even if China does not turn out in 2019/20, the global production gap in China can also be supplemented. At the same time, the market is not optimistic about the macro situation in the short term. USDA is skeptical about the moderate growth of global consumption in and the high absolute value of China's consumption growth. It is expected that consumption will continue to face downward trend. In addition to the expected year-on-year surge in China's 2019/20 year-on-year inventory, the major increase in output in the US and India is closely related to the supply variables of the El Nino phenomenon and the India monsoon advance.

To sum up, the negative impact of the macro environment on global cotton consumption is obviously less than the negative impact on China's cotton consumption. It is estimated that the cost of US cotton planting will support ICE12 at 63-64 cents / pound, and the domestic import cost will be 12500-12800 yuan / ton by 1% tariff discount. The supply side needs to pay close attention to the progress of US cotton planting and the possible driving force of India monsoon promotion.

Domestic cotton annual consumption reduction is estimated to be around 6%. If the follow-up continues to deteriorate, the reduction is expected to expand to around 11%. In 2019/20, as long as domestic cotton consumption is above 7 million 700 thousand tons per year, the import and export profits of the domestic and foreign cotton prices must be given. In the short term, the upstream and downstream of the G20 summit is still in the finished product inventory stage, compressed raw material inventory, Zheng cotton is difficult to rise, pay attention to the US tariff hearing on China's $300 billion commodity in June 17th and the trend of Sino US trade situation at the end of the G20 summit. Round the door policy, target price reform policy and weather may change the domestic demand and supply fundamentals in 2019/20, which needs close attention.