Trade War Phased Easing Zheng Cotton Market Once Close Trading

A good start in July! At the G20 super weekend, the two major risk events that hung on top of the market ended up with the best results. One is the G20 meeting between Chinese and US leaders on the weekend. Trump's stance toward China is unexpectedly soft, agreeing to restart economic and trade negotiations again, and the US side says that 300 billion tariffs will no longer be added and allows us companies to supply HUAWEI. Two, Russian President Putin said Saudi Arabia agreed to extend the reduction agreement to at least the end of this year. The long suppressed market sentiment has been fully erupted. Today, the three major indexes of A share have risen sharply, and two cities have exceeded 100 shares. However, it is important to note that although the short-term risks are eliminated and the results are even more than expected, the differences between the US and China can not be ignored. There is substantial difference in the content of the two countries' statements, and the market should not be too optimistic.

Domestic commodity futures market closed up half or half, can continue to the recent rise of varieties, asphalt rose over 5%, PTA trading, fuel rose over 3%, iron ore rose nearly 5%, five years and a half high. Today, after the opening of the 1909 contract of zhengmian main force, it was close to the daily limit board, and then fell down under a large number of sell-off. It closed 14095 up 2.4%, and closed for nearly a month and a half.

On the morning of June 29th, the leaders of China and the United States held a meeting in Osaka, Japan. The heads of state agreed to restart economic and trade consultations on the basis of equality and mutual respect. The United States no longer imposed new tariffs on Chinese products and relaxed restrictions on exports to HUAWEI. The two countries' economic and trade teams will discuss specific issues. I believe that the trade war between China and the United States has been phased out, but the long-term threat is still there, and it will have a more neutral impact on the current cotton market. After the macro risk has entered a moderate period, the market focus will be re oriented to industrial driving. At present, the planting area of the main producing countries in the world is already an established fact. The driving force of supply is turning to the weather and per unit area. The driving force of demand, steering orders and sales, and moving from passive storage to active replenishment are the key to the future market.

First, the trade war has been phased out, but the long-term threat is still there.

After the G20 summit, the trade war between China and the United States has been phased out. The following changes have been made in the cotton Market: (1) the 25% tariff that has been imposed on goods exported to the US $50 billion and $200 billion has not been abolished, and will continue to affect about 17% textile exports to the United States. (2) no more tariffs on the remaining US $300 billion have been levied on the 25% tariff, lifting the remaining majority of exports to the United States and textiles and clothing, and helping to boost market confidence; (3) the US side hopes that China will import large quantities of agricultural products, and that US cotton imports will not be absent.

We see that the outcome of the talks is slightly better than the mainstream expectations. The market generally expected to maintain the status quo. The actual result is the lifting of the 300 billion tax threat and a breakthrough in easing HUAWEI's export restrictions. However, I also want to see that the increased tariffs have not been abolished. As for the current situation of the downstream cotton textile industry in China, it is obvious that the passive inventory has been removed. The adverse effects of the tax increase have been visible for 3 months. It is not yet optimistic to see whether the confidence can be restored in the future. At the same time, due to the long-term and complexity of the trade war, its long-term threat and repetition still exist. We should make psychological preparations and risk prevention for possible changes.

Two, demand driven look at orders and sales.

Combined with the survey and downstream data performance, from the beginning of the Ching Ming Festival, the passive inventory of the downstream cotton textile industry has lasted for 3 months, exceeding the normal storage period. After the G20, the trade war between China and the United States eased, whether the order and sales could be boosted. It is still unknown whether the cotton spinning industry can turn from passive storage to active replenishment. I understand that the impact of trade war on cotton textile industry is very complex. It is not simply how much reduction in exports can reduce the demand for cotton. As the cotton spinning industry is close to the free competition industry, the average gross profit margin is 10%-15%, and the average net interest rate is 4%-6%. Therefore, a slight change in orders will affect the breakeven of enterprises, which will affect the business mentality of enterprises, and fall into the comprehensive emotional game of reducing production, price war, going to the warehouse, and transferring overseas. As a result, the cotton, cotton yarn, cloth, dyeing and clothing industry chain is very long, so it shows a very strong passive library and active replenishment characteristics. We see that the elasticity of cotton purchasing is very large, and the fluctuation of cotton price is also very large.

According to the author's understanding, the average operating rate of the downstream cotton textile industry in China has dropped by about 20%, and passive storage has led to low industrial inventories and high commercial inventories. In May, cotton business inventories were 3 million 528 thousand and 100 tons, up 974 thousand and 600 tons compared with the same period last year, and industrial stocks were 751 thousand and 600 tons, down 47 thousand and 500 tons compared with the same period last year. If trade war is to ease the market and shift from passive storage to active replenishment, we can focus on several indicators: (1) the first is that the national cotton store will be very good. At present, about 13000 yuan per ton of national cotton is still the most cost-effective raw material. Increasing procurement is the first response to the national cotton storage. (2) the sales volume and price of cotton yarn are rising, and the stock of the cotton mill is decreasing. In this case, cotton prices will have a relatively long and healthy rise, otherwise cotton prices will remain under heavy pressure. After all, the current warehouse receipts and forecasts add up to 17778 pieces, and the cotton discount is about 710 thousand tons. After that, Zheng cotton fell too fast, and many of the warehouse receipts did not come and the insurance was covered on the disk. This part of the main body's general idea is that the goods are insured instead of the city after gambling.

Three, supply driven weather and yield.

At present, the planting area of the main producing countries in the world is already an established fact, and the driving force of supply is turning to the weather and per unit area yield. In June 28th, according to the USDA planting area report, the 2019/20 cotton planting area in the United States was 13 million 720 thousand acres, a decrease of 2.7% compared to the same period last year, slightly less than the 13 million 780 thousand acre report at the end of March, and the data were slightly more favorable. At present, the growth situation of the United States and cotton is normal. As of June 24th, the US cotton planting progress was 96%, the average value in the past five years was 98%, the excellent and good rate of the United States cotton was 50%, compared to 42% last year, and the yield is expected to be high. In June 20th, India's new flower planting area was 1 million 818 thousand and 300 hectares, a decrease of 12% compared with the same period last year. With the rapid advance of the southwest monsoon, it is expected that the sowing schedule will be raised in the future. Xinjiang's low rainfall in the country is unfavorable to cotton growth, but Xinjiang's field management is excellent, and the follow-up impact must be followed.

To sum up, the phased easing of Sino US trade war will have a more neutral impact on the cotton market today, and the market will go higher and digest more. After the macro risk has entered the adjustment period, the market focus will be re oriented to the industry drive, and the supply side will be driven to the weather, unit production and demand driven driving to order and sales. In the next period of time, the new range of the US cotton index is expected to see (65, 78) cents / pound, and the new cotton index area will see (1270015000) yuan / ton, the cotton price will fluctuate in the new section, and the center of gravity will move slightly upward.