Deterioration Of Foreign Trade Situation Leads To The Cotton Textile Industry Chain Still In Trouble

It is an indisputable fact that the benefits brought by the loose epidemic prevention policy have been fed back in the multinational market, which is reflected in the retaliatory growth of textile and clothing consumption. But can the domestic market follow suit? After all, from August 2020 to July 2021, domestic clothing consumption has gone through a round of explosive recovery. The direct reason for the recovery is that the initial extensive epidemic prevention and control policy was adjusted in time after effective results were achieved, the overall social epidemic situation appeared sporadically, and the country entered the state of resumption of production. Therefore, the space rate of the second recovery is probably not as good as that of the first recovery.

The preference of domestic consumers for textiles and clothing continues to decline, and this trend will last for nearly 10 years from 2013 to 2022, which shows that the market development has become a bottleneck.

For domestic sales, we can only draw a conclusion of a moderate recovery. Moreover, the foreign trade situation remains weak. Although the American clothing fabric market is about to usher in the switch from active to passive destocking at the retail end - the retail sales increased by 2.52% month on month and 6.28% year on year, the overall inventory is still high, with the wholesale inventory increasing by 36.16% year on year in January. The sanctions on Xinjiang cotton products led to the market share of China's export cotton products falling to 21.47% in January, which was behind the average 21.99% last year. The China Chamber of Commerce for Import and Export of Textiles disclosed on the 7th that China's textile and clothing exports fell 18.5% year-on-year in January and February 2023 in US dollars.

The deterioration of foreign trade situation has greatly curbed the recovery of the overall industrial chain, resulting in the situation that the domestic sales data is good - the social retail sales of textile and clothing in January and February increased by 5.4% year on year, which is greater than the growth rate of the total social retail sales - the cotton textile industrial chain is still trapped in the dilemma of internal volume.

With the arrival of the four peak seasons of gold, silver and silver in March and April, the first quarter quarterly report of the head textile and clothing listed companies disclosed that if the profit recovery of the textile industry is less than expected, the problem of profit transmission in the industrial chain is exposed, and the macro capital may be aware of the mistakes made in betting on cotton bulls in recent months, the differences on the demand side will be temporarily resolved by the escape of bulls. Once the macro factors appear negative events, the macro bulls' allocation of funds in cotton may accelerate their position. The withdrawal of bulls may lead to the strengthening of the basis, thus promoting the transaction of price point resources. As the actual demand side, the yarn mill will also further reduce the psychological price of cotton anchor in order to increase spinning profits. This year, the support of futures price bulls will further loosen, and the movement of profit redistribution in the industrial chain will also be launched.

How to view potential futures decline opportunities

We believe that the greater certainty of the current market lies in the rush to harvest cotton in the new season rather than the recovery of the demand side. Although the recovery of the demand side is also a deterministic event - the evolution of the industrial inventory cycle will certainly lead to the expansion of cotton demand, it is difficult to determine the inflection point of the inventory in the European and American end markets.

On the contrary, the rush collection event focuses on the deepening of two major contradictions:

1. The contradiction between the rising cost of cotton farmers in Xinjiang and the difficulty in raising the target price of direct subsidy policy;

2. The contradiction between the slow elimination of overcapacity of Xinjiang ginning plants and the slow growth of Xinjiang seed cotton output. Although the planting season has not yet started, it seems too early to discuss the rush to harvest, but the differences of the new season crops will slowly unfold on the 01 contract.

In the 22/23 year when supply exceeded demand, the market focus was on how to realize the recovery expectation. However, when the foreign trade market had not yet recovered, it could not give more marginal benefits to cotton consumption. In the next year, the contraction of the supply side and the evolution of the textile inventory cycle in the foreign trade market will drive the price more upward. It is suggested that, with the help of the withdrawal of macro funds, bargain hunting should be carried out for multiple orders of Yuanyue 01 contracts.