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The Downstream Market Will Become The Key Factor Restricting The Rise Of Cotton Price After Entering The Slack Season
The downstream market will become the key factor restricting the rise of cotton price after entering the slack season
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Since the middle of September 2023, the global economy has been faltering. Although the inflation level has declined, it is still stubborn. The Palestine Israel conflict has suddenly intensified, and the global consumption growth is under heavy pressure. Cotton in the northern hemisphere has entered the stage of large-scale listing. The next step of cotton market trend will be discussed in this monthly report.
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Part I Market Review
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1、 Weak international cotton price shocks
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Since the middle of September, although the Federal Reserve has kept the interest rate unchanged in September, it has hinted that interest rates may continue to rise this year, and the liquidity risk of the banking industry has intensified. The conflict between Russia and Ukraine continued to escalate, and the global economic uncertainty further increased. The supply of new cotton in the northern hemisphere is imminent, the global textile market demand is sluggish, and the international cotton price is weak and volatile. As of October 19, 2023, the settlement price of the main contract of ICE cotton futures was 84.27 cents/pound, down 2.51% from the middle of last month; The international cotton index (M) representing the average landed price of imported cotton at China's main port is 96.08 cents/pound, which is converted into RMB 16727 yuan/ton of import cost (1% tariff, 9% VAT, and no port fees), down 2.97% from the middle of last month.
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2、 The domestic cotton price fell rapidly after rising
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Since the middle of September, the domestic new cotton harvest has started, and the capital market has instigated the expectation of seed cotton harvest, driving the domestic cotton price up. During the National Day holiday, the reserve cotton continued to rotate to ensure supply. The Agricultural Development Bank of China strengthened the risk supervision of seed cotton purchase. Ginning plants generally took a cautious attitude to purchase seed cotton, and there was no rush to harvest. At the same time, orders from downstream textile mills have weakened. The above factors caused Zheng Mian to fall back quickly. As of October 19, 2023, the settlement price of the main contract of cotton futures in Zhengzhou Commodity Exchange was 16470 yuan/ton, down 4.24% from the middle of last month; The national cotton price B index, representing the market price of standard lint in the mainland, was 17785 yuan/ton, down 1.44% from the middle of last month.
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Part II Analysis and Prospect
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1、 Environmental analysis at home and abroad
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The conflict between Palestine and Israel escalated, and the International Monetary Fund lowered its forecast for world economic growth next year. The World Economic Outlook Report released by the International Monetary Fund on October 10 pointed out that the global economy is currently recovering from the severe shocks of the past few years, but the recovery process is slow and uneven. The negative impact of the continued tightening of monetary policies by major central banks in Europe and the United States on the economy is emerging. It is estimated that the global economic growth rate in 2023 will be 3.0%, which is equal to the forecast data in July, In 2024, the global economic growth rate will be 2.9%, 0.1 percentage point lower than the forecast data in July. In the short term, the escalation of the Palestinian Israeli conflict has exacerbated geopolitical tensions, the prices of safe haven assets have jumped, and the performance of global stock markets is relatively calm. The long-term impact on the global economy needs further observation.
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The rise in energy prices has eroded the achievements of the United States in curbing inflation. The International Monetary Fund predicts that with the tightening of monetary policy and the decline of international commodity prices, the global inflation rate is expected to steadily decline from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024. In general, the inflation situation in most countries is expected to return to the target level by 2025. In the short term, inflation in the United States shows signs of continued easing. CPI rose 3.7% year-on-year in September, the same as that in August. However, considering that the residual heat of energy inflation has not dissipated, the efforts of the United States to curb inflation may be frustrated.
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China's economic prosperity level has rebounded. With the continuous accumulation of policy effects and the increasing number of positive factors in economic operation, China's economic prosperity has rebounded. The latest data from the National Bureau of Statistics shows that China's manufacturing purchasing managers' index (PMI) was 50.2% in September, up 0.5 percentage point from the previous month, and returned to the expansion range after five months; Due to the loss of low base effect, China's GDP growth slowed down to 4.9% in the third quarter from 6.3% in the second quarter, higher than the 4.5% level generally expected by the market. Looking forward to the fourth quarter, the Economic and Financial Outlook Report for the Fourth Quarter of 2023 released by the Bank of China Research Institute shows that the GDP growth in the fourth quarter is expected to be about 5.7%. The task of stabilizing economic growth, adjusting the structure and promoting reform is still arduous. In the future, China needs to better solve problems and challenges in development, and enhance the endogenous growth momentum of the economy.
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2、 New cotton has been listed in the international market, and consumption is not improving
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（1） Cotton harvest in the Northern Hemisphere
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The harvest of new cotton in the United States has gradually begun, and the proportion of good seedlings has rebounded. According to the data of the United States Department of Agriculture, as of October 8, the rate of American cotton boll opening was 82%, a decrease of 1 percentage point over the same period last year; The harvest progress was 25%, 3 percentage points less than the same period last year; The excellent rate was 32%, an increase of 2 percentage points over the same period last year and 2 percentage points over the previous week.
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Cotton planting in southern India ended, and cotton yield in northern India was threatened. According to the statistics of the Ministry of Agriculture of India, as of September 22, 2023, India's new cotton planting area has accumulated to 12.34 million hectares, a year-on-year decrease of 3.3%, but it is still in the middle high position in recent years. According to the local processing plant, the cotton planting in southern India has entered the final stage. Affected by the cotton bollworm in northern India and the dry weather from August to September, it may cause some damage to the cotton yield and quality of India in 2023.
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Pakistan's cotton production has increased significantly. According to the data of Pakistan Ginning Mills Association, as of October 1, Pakistan's new cotton on the market was 850000 tons, up 71% year on year. It is expected that the final output will reach 2040000 tons, 410000 tons higher than the International Cotton Advisory Committee (ICAC) forecast.
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Australia's cotton output and quality are at a high level, and its export to China has recovered significantly. By the end of September, nearly 90% of Australia's new cotton processing and inspection in 2023 had been completed, and local cotton enterprises expected Australia's cotton output to be about 1.2 million tons. The Australian Cotton Exporters Association and the Australian Cotton Association said that thanks to the good weather during the cotton growing period, the main quality indicators of new cotton exceeded most years. According to Australian customs data, Australian cotton exports to China will reach 61000 tons in August 2023, the highest level since July 2014.
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（2） International textile market demand continues to decline
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The demand of international textile market continues to be weak. The survey report of the International Textile Federation (ITMF) in mid September showed that the global textile industry was still in poor condition. The number of orders improved briefly in May, dropped sharply in July, hit a new low in September, and the number of orders in the entire industry chain was at the lowest level. At present, the trend of weak demand is still intensifying, and manufacturers are cautious about the future development situation.
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The retail sales of clothing in the United States increased slightly and the speed of wholesale to stock was accelerated. According to the data of the U.S. Department of Commerce, the retail sales of clothing stores in the United States in August 2023 were $26.2 billion, an increase of 0.89% over the previous month and 1.31% over the same period last year; Recently, the speed of stock removal has been accelerated. The inventory of clothing and clothing fabrics of American wholesalers was 35.457 billion dollars, down 2.59% from last month and 15.56% from the same period last year. The World Federation of Large Enterprises released a report on September 26, saying that the U.S. consumer confidence index fell to 103 in September from 108.7 after the revision in August, the lowest level in nearly four months.
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（3） Global cotton supply and demand will be further relaxed in 2023/24
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According to the October data forecast of the International Cotton Advisory Committee (ICAC), the global cotton output in 2023/24 will be 24.98 million tons, a decrease of 90000 tons compared with the previous month, a decrease of 0.36%, an increase of 360000 tons year-on-year, or 1.46%; The consumption was 23.31 million tons, an increase of 100000 tons over the previous month, an increase of 0.43%, and a year-on-year decrease of 140000 tons, a decrease of 0.60%; The relationship between supply and demand has expanded from 1.17 million tons of output exceeding demand in the previous year to 1.67 million tons in the current year. The inventory consumption ratio at the end of the period was 98.33%, down 0.68 percentage points from the previous month and up 7.75 percentage points year on year.
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3、 The year of new and old cotton in China is smoothly connected, and the textile slack season may come ahead of schedule
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（1） The effect of storing cotton to ensure stable supply and market is significant, and the transition between old and new cotton is stable in the year
The national reserve cotton continued to supply, and the effect of ensuring supply and stabilizing the market was outstanding. In order to ensure the cotton demand of textile mills, from July 31 to October 19, the cumulative listing volume of reserve cotton was 928000 tons, and the actual transaction volume was 784000 tons, with a transaction rate of 84.50% and an average transaction price of 17548 yuan/ton. The effect of the export of reserve cotton wheel to ensure stable supply and market is significant: first, ensure the cotton demand of textile mills. After the launch of rotation, the bidding enthusiasm of textile mills was high, and 100% of the reserved cotton was sold for more than one month in a row. The Central Cotton Storage Company timely adjusted the listing quantity and increased the supply according to the market demand, and continued to rotate for the first time during the National Day holiday, demonstrating the firm determination of the country to stabilize the market, and ensuring the cotton demand of textile mills in the period of the alternation of old and new cotton years; Second, effectively reduce the risk of speculation. The rising trend of domestic cotton prices has been curbed, greatly reducing the risk of rush to harvest in the new cotton market. As of October 19, the settlement price of Zheng Mian's main contract was 16470 yuan/ton, 5.04% lower than that before the start of the round (July 28); Third, reduce the cost of cotton used in textile mills. According to the feedback of Shandong Yuncheng Textile Factory, after some enterprises used reserve cotton for production, their profits improved by nearly 500 yuan/ton, and enterprises were enthusiastic about purchasing reserve cotton.
The harvest of new cotton is gradually reaching its peak, and the total yield per mu cannot be determined in the early stage. According to the survey of China Cotton Network, as of the middle of October, the progress of machine picking cotton in northern Xinjiang was more than half, and the time of machine picking cotton in southern Xinjiang was later than that in northern Xinjiang. Due to the impact of disaster reseeding on some cotton in the spring sowing stage, the growth period was shortened, leading to a decline in the weight of single boll of some early maturing cotton varieties currently picked, but the overall decline was in line with expectations. Considering that the weather in Xinjiang's main cotton producing areas is basically normal after the National Day holiday, which will provide a strong guarantee for the later cotton harvest, the current cotton yield per unit area is not enough to determine the total yield level of this year. According to the forecast data of China's cotton growth survey report released by the National Cotton Market Monitoring System in September, Xinjiang's cotton output in 2023 will be 5.65 million tons, down 9.3% year on year, and up 5.37% from the average of the past five years.
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The deadlock in the acquisition market has eased. Since the new year Xinjiang cotton began to weigh, while the national reserve cotton continued to rotate to maintain the stability of the market, Xinjiang Agricultural Development Bank also strengthened the supervision of ginning plant loans. Ginning mills are generally cautious about the purchase of seed cotton this year, and the purchase price is mainly 7.5-7.8 yuan/kg. However, cotton farmers have high expectations for seed cotton prices due to the speculation in the capital market, and the short-term purchase market has entered a stalemate. After the National Day holiday, Zheng Mian's opening fell sharply, and the enthusiasm of cotton farmers to pursue high prices began to loosen. The number of active inquiries increased, and the sales volume of seed cotton also increased.
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（2） The slack season of the textile market may be ahead of schedule, and the enterprise's intention to purchase new cotton is not high
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Domestic textile mills are beginning to accumulate stock, and their willingness to purchase raw materials is not high. It is reported that before the National Day, cotton yarn quotations in the light textile markets of Guangdong, Jiangsu, Zhejiang and other places generally fell by 300-500 yuan/ton. After the National Day, textile mills in some regions reported that the number of orders received was slightly reduced, and the stock accumulation phenomenon appeared, and the low peak season of the textile market became increasingly prominent. According to the data of the Ministry of Industry and Information Technology, from January to August 2023, the industrial added value of textile mills above designated size decreased by 2.8% year on year, the operating revenue decreased by 4.2% year on year, and the total profit decreased by 12.1% year on year; The output of yarn, cloth and clothing of enterprises above designated size decreased by 1.7%, 4.6% and 10.3% respectively year on year, while the output of chemical fiber increased by 6.9% year on year. Influenced by the downturn in cotton consumption in the downstream market, the confidence of textile mills has declined. At the same time, considering that reserve cotton continues to supplement market supply, enterprises are not willing to purchase new cotton in the short term.
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Insufficient external demand combined with a decline in international market share led to a marked slowdown in clothing exports. According to the data of the General Administration of Customs, under the influence of the low base effect, the textile and clothing exports in September fell 6.5% year on year, 3.7 percentage points lower than last month. Among them, textile exports were US $11.64 billion, down 3.4% year on year and 0.5% month on month, while clothing exports were US $14.56 billion, down 8.8% year on year and 10% month on month.
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（3） Forecast of China's cotton production, sales and stock in 2023
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Based on relevant special investigations and analysis of economic environment and market conditions at home and abroad, the national cotton market monitoring system forecasts China's cotton production, sales and stock in 2023 as follows:
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In 2023/24, China's cotton inventory at the beginning of the period was 5.71 million tons, up 8.1% year on year; The output was 6.05 million tons, down 10.0% year on year; The import volume was 1.7 million tons, up 19.3% year on year; Consumption was 7.6 million tons, down 1.3% year on year; The relationship between supply and demand has expanded from 980000 tons in the previous year to 1550000 tons this year; The export volume was 20000 tons, up 14.3% year on year; The ending inventory was adjusted to 5.84 million tons, up 2.3% year on year; The inventory consumption ratio was adjusted to 76.67%, up 2.65 percentage points over the previous year.
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Main conclusions
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To sum up, macroeconomic risks keep rising, the downward pressure on the global economy remains unabated, and the negative impact on consumption continues to emerge. The large-scale supply of cotton in the northern hemisphere is imminent, and the phased supply and demand pattern is relatively loose. At present, in view of the weakening risk of harvesting Xinjiang cotton in the upstream of China, the growers' psychology of chasing after higher prices is loose, which has played a role in inhibiting cotton prices to a certain extent. In addition, in the later period, after the downstream market enters the slack season, the textile mills have relatively limited digestion capacity for new cotton, which will become a key factor restricting the rise of cotton prices.
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